A NEST egg?

The Pensions Act 2008 imposes a duty on employers to enrol all employees who meet the criteria into a qualifying pension scheme and also to make contributions into that scheme for those employees. The operative date is staged and will apply to the largest employers from1 October 2012. The aim is to increase pensions saving for retirement.

The landscape against which this auto-enrolment will apply is the limited success in voluntary saving for retirement (particularly amongst low to middle income employees), coupled with improvements in longevity, the increase in cost to the state in providing pensions, increasing state pension age, abolition on 1 October 2011 of the default retirement age, and in March this year the ECJ decision in the Test-Achats case (Association Belge des Consommateurs Test-Achats ASBL v Conseil des Ministres (C-236/09)), that from December 2012 gender cannot be used as a factor when pricing insurance products, which is likely to impact on the cost of pension annuities.

This automatic enrolment:

• applies to qualifying employees working or ordinarily working in the UK aged between 22 and state pension age (although other employees can ask to be enrolled);
• relates to qualifying earnings, basically all income relating to the employment, including commission, bonuses, overtime, statutory sick pay, and maternity, paternity and adoption leave pay;
• does not require employees to complete any forms;
• requires employers to provide specified information to employees within a month of the statutory requirements applying to them;
• requires employees and employers to pay contributions;
• has very few exemptions: there is no minimum number of employees, and employees drawing a pension are not excluded;
• permits employees to opt out of auto-enrolment at any time by completing an opt-out notice in prescribed form. If a valid opt-out notice is received by a scheme then the scheme must refund contributions paid;
• requires automatic re-enrolment in the scheme every three years. So if an employee had opted out then he or she would be automatically re-enrolled three years later and would have to repeat the opt-out process;
• requires employers to use a registered pension scheme, to keep records, and to pay contributions on time;
• will be regulated by the Pensions Regulator. Employers will have to provide information to the Pensions Regulator. There are sanctions and penalties for non-compliance and inducing employees to opt out.

NEST building

An option for employers is to use the National Employment Savings Trust (“NEST”), established by the Pensions Act 2008 and also available from 1 October 2012.

NEST is a trust-based scheme designed for people who are new to saving for retirement, with each member having a retirement fund with investment choices. The administrator which will run the scheme, a company, is to provide administration services and the first fund managers have already been appointed.

NEST’s first investment strategy and Statement of Investment Principles were published in March. The investment objective for the default fund is a net return above inflation.

So, will employers opt for NEST? Those with pension schemes may make adjustments to those schemes to meet the requirements for auto-enrolment. There will also be competition from other providers. The first private sector alternative has been announced and others will no doubt follow. Many employers have found themselves with multiple arrangements, so may use NEST (or an alternative):

• as a “bolt-on” scheme for some employees; or
• as a “reception” scheme, where there is a waiting period before an employee can join an employer’s main scheme; or
• running in parallel with another scheme to meet the basic statutory requirements, with the other scheme being used for contributions in excess of minimum levels.

Other employers may decide to use NEST (or an alternative) as the only scheme to meet auto-enrolment requirements, if the workforce meets the criteria.

Auto-enrolment and NEST are being introduced at a time of transition in the workplace from either employment or retirement towards staged retirement for an increasing number of people. The introduction of compulsion is not unexpected and the new regime addresses many of the structural weaknesses, but the continuing absence of incentives to save plus other financial challenges for employees, and the recalibration of working practices due to the changes outlined at the beginning of this article (and no doubt other changes also), are likely to continue to pose obstacles to material increases in saving for retirement.

June Crombie, partner, Pensions, Biggart Baillie LLP