Workplace Pensions Savings and NEST - An Update (Dec 2010)

As the idea of compulsory pension saving was instigated by the previous Labour Government, it was widely expected that the new Coalition Government would drastically overhaul their proposals and in June 2010, the Department of Work & Pensions announced a review.

Following publication of the independent review, the Government have agreed to take forward the recommendations made so although there are still some issues to overcome, we can be fairly confident of what will now happen.

The main aim of government is to ensure that pension saving is promoted via the automatic enrolment of 'jobholders' into a pension scheme, which can be an existing employer scheme that meets certain quality criteria, or the Government backed scheme, known as the National Employment Savings Trust (NEST).

The NEST Corporation, the trustee body responsible for running the NEST scheme, has recently announced initial 10 year contracts for administration and fund administration services with TCS and State Street respectively so we can deduce that compulsory pension saving is here to stay.

The timetable

From 1 October 2012 there will be an obligation on employers to auto-enrol their eligible employees into a pension scheme but as it will not be possible to accommodate all the new joiners on day one, it will be phased in over time until early 2016. The actual date an employer is required to introduce auto-enrolment will be determined by its size and in some cases, by its PAYE reference number so correct timing will be crucial. Different criteria will be used for new employers after April 2012.

An employer will have to choose whether to use a qualifying workplace pension such as a Group Personal Pension, an occupational scheme or the NEST scheme and will have to register their choice with the Pensions Regulator within a certain timescale.

Eligible employees

Only eligible employees, those aged between 22 and state pension age with earnings equal or greater than the income tax personal allowance (£7,475 from 2011/12) will need to be automatically enrolled so it will be necessary to identify those employees. There will be some employees who will not meet these criteria but an employer will be obliged to enrol them into a scheme, should they wish to join.

Thankfully, an agreed recommendation from the review was that an employer could operate a three month waiting period before automatically enrolling employees into a qualifying scheme, rather than the previous limit of 30 days. This should particularly help employers that have a high turnover of short term employees.

There will be opportunities for employees to opt-out of a scheme within a month of being provided with the necessary scheme information, re-join at a later date and an on-going requirement for employers to automatically re-enrol opted out members on a regular basis. These are all duties that an employer will need to become more familiar with over the coming years with a variety of pitfalls to avoid.

Alternatives to NEST

To qualify as a suitable alternative to NEST, a workplace or occupational pension scheme must meet certain minimum levels of contributions or accrual rate, in addition to automatic enrolment. The staging approach required for auto-enrolment will also be used with regards to the minimum contribution levels, with two transitional periods before the full level is required from October 2017.

For defined contribution, occupational and workplace pensions, a statutory minimum contribution of 8% of �qualifying earnings� will be required from October 2017, of which at least 3% must be derived from the employer. This is unfortunately not as straightforward as it may initially sound as the definition of �qualifying earnings� involves PAYE earnings between a band of earnings currently from £5,715 to £38,185, which may include remuneration elements not normally used in existing scheme definitions. These may include bonuses, commissions, parental pay, overtime etc.

To try and simplify this issue, an employer will be able to self-certify that their scheme has met the statutory minimum contribution requirement by choosing one of 3 calculation methods. Which method is chosen will depend on what proportion of total pay constitutes the scheme definition of �pensionable salary� and may mean that to comply, a minimum of 9% of pensionable pay is required rather than the 8% that may ordinarily be assumed.

Although NEST is yet to finalise its investment choices, it has concluded that its target market should have a low-risk default investment fund with a limited choice of other low-cost funds, including some ethical or religious based options. Some details regarding the proposed charging structure are already known but further information is likely to be released shortly.

An alternative qualifying scheme will be expected to provide at least one default fund, which should be used when an individual does not specify an investment choice. The provider of the scheme will be expected to operate high level principles when designing a default fund which means that it should be diversified, affordable and involve an element of risk reduction known as �life styling�.

Ongoing governance of the default option chosen will be required and members should receive appropriate regular communication regarding its objectives and the mechanism used for reducing risk as retirement approaches.

Regulation of the process

The Pensions Regulator will be responsible for ensuring employers comply with the regulations and have intimated that they will focus on employer education rather than fines and prosecution in the first instance for any non-compliance. Initial and regular registering of schemes with The Pensions Regulator will be required in addition to compliance with time limits on contribution payments and record keeping. They will also monitor any inducements to employees by employers to opt-out of the scheme.

Although they seem to be taking an initial light touch to any non-compliance, fixed penalties and escalating fines can be levied on either employers or third parties who are deemed to have contributed to an employer�s failure to comply.

There are a number of other issues that will be resolved in the coming months as the Government proceed with the implementation of these changes. As greater detail is known, it will allow employers to choose the form of pension provision that best suits their company and ensure they do not lose the ability to offer a good quality pension scheme for their staff.

Contact Cartlidge Morland for a free, no obligation pension scheme audit to see if your current pension scheme is likely to meet the minimum requirements, or to identify the financial impact to your business of meeting the qualifying criteria if it does not.

Cartlidge Morland is an independent employee benefits consultancy. We provide benefit services to a wide range of partnerships, family companies, PLCs, charities and governmental organisations. We also provide financial advice to private clients, investment management and mortgage broking services

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