In December 2006, the former Government published a White Paper outlining its workplace pension reforms, including proposals for NEST (the National Employment Savings Trust) – previously called Personal Accounts. This led to the Workplace Pension Reforms set out in the Pensions Act 2008. These reforms aim to increase individuals’ savings for retirement.
A new, simple, low-cost pension scheme, NEST will be introduced as part of the workplace pension reforms. The new employer duties under the Government’s workplace pension reforms will be introduced over a four-year period from 1 October 2012. The staggered introduction of these duties is known as ‘staging’.
Broadly speaking, the new duties will apply to the largest employers first, with some of the smallest employers not being affected until 2016. As part of the new duties, firms will be enrolled into NEST.
The former Government established NEST as part of pension reforms aimed at tackling a lack of adequate pension savings among low- and middle-income UK workers. The NEST’s investment strategy will be low-risk and there may be a possibility that, after five years, savers will be able to move their money out of the NEST into other pension schemes.
The reforms include the stipulation that from 2012 employers either pay a minimum contribution of 3 per cent into the scheme or automatically enroll workers in existing pension vehicles. NEST will launch its scheme for voluntary enrolment in the second quarter of this year.
NEST will be a trust-based defined contribution occupational pension scheme. It will be regulated in the same way as existing trust-based defined contribution schemes and will provide people with access to a simple, low-cost pension scheme. The charges are a 1.8 per cent charge on the value of each contribution to cover NEST’s start-up costs, and an annual management charge of 0.3 per cent of the value of the fund.
The new two-part charge by NEST will work as follows: if a member has a fund of £10,000, they will pay £30, due to the 0.3 per cent annual management charge; if that same member makes a monthly contribution of £100, including tax relief, they will pay £1.80 on the sum, due to the 1.8 per cent contribution charge.
There will be an annual contribution limit of £3,600 (in 2005 earnings’ terms) into NEST. This will be uprated by earnings year on year. This limit will be reviewed in 2017. Workers will be automatically enrolled into the default investment fund but there is likely to be a choice of investment funds, which may include options such as social, environmental and ethical investments. Those not wishing to make an investment choice will stay in the default fund.
Employers will need to automatically enrol their eligible workers into a qualifying pension scheme and make contributions to it. Workers will be able to opt out of their employer’s scheme if they choose not to participate.
Workers who give notice during the formal opt-out period will be put back in the position they would have been in if they had not become members in the first place, which may include a refund of any contributions taken following automatic enrolment.
Anyone who joins NEST will be able to continue to save in the scheme even after they leave the workplace or move to an employer that does not use NEST. The self-employed and single person directors are not eligible for auto-enrolment but will be able to join NEST.
The cost of guaranteeing these benefits for an ever longer living population has made almost all private sector firms still offering DB drop it for new joiners and the Government has commissioned an ongoing review aimed at reducing the cost of DB schemes in the public sector.
People who move jobs can transfer any savings they have built up in a DC workplace pension to their new employers scheme (assuming they have one), and money can also be transferred between different personal pensions.
Personal or individual pensions are
DC schemes in which people pay into funds independent of their employers, managed by insurance companies, and again buy an annuity at retirement.
NEST has confirmed the five product providers for its annuity panel.
Tim Jones, chief executive at NEST, said, ‘Our panel will enable members to buy a retirement income product if this is appropriate to their needs, even if they have a small pot.
‘Establishing a panel of high quality providers committed to NEST’s requirements means we can help members meet their aspirations.’
Companies can choose to take on ‘NEST’ as their pension scheme, set up a different scheme with a private provider or maintain their existing schemes if they have one, but all staff have to be enrolled in such a scheme and only withdrawn at their own request, which in turn must be within three months of joining.
In the latter of those three scenarios, the employer must pay the equivalent of a minimum of 3 per cent of the scheme members’ annual salary.
Workers under 22 years old and/or earning less than the minimum tax paying wage (currently £7,475 per year) are exempt from this change in the law. Certain workplaces – the vast majority in the public sector – will still offer staff a defined benefit (DB) pension scheme.
As with defined contribution (DC) pensions, employers and employees will pay into a pot, but the employer guarantees an annual income, post retirement, based on a percentage of the employee’s salary at retirement (or occasionally, the average salary during their time with that employer).