Government welcomes NEST review recommendations

Alan Collins

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Following the recommendations of the Pensions Commission in 2006, the previous Government proposed the introduction of the National Employment Savings Trust (NEST), to address the lack of pension provision for employees who do not have access to workplace pension schemes.

From the perspective of employers, a major issue surrounding NEST is the likely cost of implementing the scheme, especially the associated administrative costs. An independent review has been carried out into the proposals for NEST – Making Auto Enrolment Work, which seeks to address the question as to whether the cost to employers imposed by NEST is necessary and proportionate.

Prior to the review, the proposed structure for NEST had the following key features:

  • Every business with at least one eligible employee must comply with the regulations.
  • An eligible employee is one who earns enough to pay National Insurance contributions.
  • All eligible employees must be enrolled immediately in the workplace pension scheme.
  • Employees are to be enrolled automatically, without need for application forms
  • Contributions are calculated from qualifying earnings (earnings in excess of the National Insurance Primary Threshold, currently £5,035 per annum, which include variable items such as overtime payments and bonuses).
  • Will be introduced in stages, commencing with employees of large companies, commencing in October 2012.
  • Minimum employer contributions commence at 1% of qualifying earnings from 2012 rising to 3% by 2017.
  • Minimum employee contributions commence at 1% of qualifying earnings from 2012 rising to 5% by 2017.

After consultation with business and the pensions industry, the authors of the report made the following key recommendations (which the new Government has welcomed).

  • Every business with at least one eligible employee must still comply with the regulations.
  • Contribution levels and phasing of contributions remain unchanged.
  • The earnings threshold at which an employee is automatically enrolled is increased to be equal to the personal allowance for income tax (currently £7,475 per annum). The threshold at which contributions are payable remains the National Insurance primary threshold.
  • An optional waiting period of three months should be introduced before an eligible employee is automatically enrolled. However, employees may choose to opt in at any time, and the company would then need to pay contributions.
  • The system by which employers can certify that their defined contribution schemes meet the required contribution levels should be simplified.
  • Further de-regulation measures should be introduced to ease the administrative burden on employers.
  • The current cap on contributions (£3,600 per annum) and ban on transfers in and out of NEST is to be reviewed in 2017.

The impact of the recommendations is to reduce the number of eligible employees by around 1 million, which will reduce the costs associated with NEST, especially for companies with a high proportion of low-paid workers. Further simplification and cost reduction is achieved by simplifying the certification process for businesses with current defined contribution schemes and by reducing the number of short-term employees who would be automatically enrolled. Clearly, the proposals surrounding NEST will continue to cause displeasure amongst small employers. There also continues to be a risk that contributions are levelled down in existing schemes to match the minimum requirements of NEST.

Employees may also choose to opt-out of their employer’s scheme. However, employers are not permitted to induce employees to opt out of pension schemes, and a company which did so would be fined from £1,000 to £5,000 (depending on the number of employees).

Please contact us for further information or visit the NEST website.

Alan Collins

Post by Alan Collins

Head of Trustee Advisory Services at Spence he provides actuarial, funding and investment advice to trustees and sponsors of ongoing defined benefit schemes.