UK: Building the NEST
Announced in the Pension Act of 2007, the National Employee Savings Trust is a work in progress. Nina Röhrbein reports
While the UK's Pensions Act 2007 reformed state pensions and introduced arrangements to increase the state pension age, the launch of the National Employee Savings Trust (NEST) will start to go live from 2012 - the main creation of the Act.
Starting from October 2012, employers will have to automatically enrol all eligible employees into their pension scheme. Eligible are all workers aged between 22 and state pension age who work in the UK and earn between £5,034 (€6,147) and £33,540 annually in 2006/07 terms with the figures set to be updated for 2012. Employers of all eligible employees have to make a minimum contribution into the pension scheme.
The total minimum contribution to all employees' retirement savings pots will have to equal 8% of their qualifying earnings. Of this 8%, the employer will have to contribute a minimum of 3%, with the rest being made up of tax relief (1%) and the employee's contribution (4%). The maximum contribution is £3,600 in 2005 terms.
The employer duties and how they are implemented are specified by secondary legislation. The reforms will be introduced in stages between October 2012 and October 2016 with the largest employers affected first.
NEST has now taken shape under the trusteeship of NEST Corporation, which any employer regardless of its size can use to meet its minimum legal duties. It specifically aims to meet the needs of low to moderate earners and their employers.
An individual's membership of NEST is portable and can travel with them throughout their working life, meaning there will be no continuing administration for employers when a NEST member leaves their employment.
However, NEST Corporation can only accept transfers in and out of the scheme only in very limited circumstances.
Employers can either offer only NEST or offer it alongside another scheme they already have. They can also use NEST for a certain category, grade or group of workers, such as seasonal workers, new joiners or staff who take career breaks.
It is designed to complement rather than compete with existing workplace pension provision and increase access to workplace pensions for between 3-6 million employees, as currently 750,000 employers in the private sector offer no workplace pension.
"NEST introduces an interesting baseline for many DC schemes," says Will Aitken, senior consultant at Towers Watson. "We see similarities with the healthcare market. The NHS is available to all individuals at little or no cost, but many employers choose to offer private healthcare to differentiate themselves. Similarly, for employers who want to contribute more than the statutory minimum, there will be value in providing pensions through a more employer specific solution than NEST."
The Government expects NEST to achieve the Pensions Commission's ambition of a low cost scheme with an annual management charge of 0.3% of the value of the fund (0.3% AMC) over the longer term. But before it is fully established, it faces an inevitable gap between its costs and revenues. The Government intends to provide NEST with a loan to bridge this funding gap, in line with its commitment that the scheme be established at nil cost to taxpayers. To meet its start-up costs, NEST will initially make a 2% charge on the value of each contribution.
The Confederation of British Industry (CBI) warned earlier this year that high initial charges on NEST could mean that savers would be better off investing in private sector pension funds carrying annual management charges of up to 0.6% for at least the first six years.
NEST is currently under review by the current government and a review panel is due to report on or before 30 September. The scheme's investment strategy will be announced by NEST Corporation later this year.
"NEST becomes a simple go-to option for an employer that either has not got a pension scheme or is looking to segment their workforce and maybe divert the transient element towards NEST," says Lee Hollingworth, head of DC consulting at Hymans Robertson. "But it is not a direct challenger to the kind of experience one can generate through a well-run, well-governed employer-sponsored arrangement. There is a risk position because NEST is still in its infancy and an employer will want to wait and see what happens next with NEST. It is under review and the government is under a very difficult timetable to get NEST delivered in time for when auto-enrolment will start. NEST will need to be priced to make a profit, which makes it look relatively uncompetitive to a gold standard DC scheme at the moment."