Over the last decade, the Government has conducted a major review of the UK pensions system, due to growing concern about the inadequacy of pensions savings and an ageing population. This culminated in the publication of the Turner Commission’s report in November 2005. Following the recommendations of the Turner Commission, the Government published a White Paper in 2006 proposing the introduction of a national pension saving scheme, intended to simplify the process of saving for retirement. The White Paper also proposed that the scheme would be supported by compulsory employer contributions in order to encourage people to save for retirement.
The Pensions Acts of 2007 and 2008 (and the relevant secondary legislation) introduce the legislative framework required to implement those reforms, including the establishment of the National Employment Savings Trust (NEST).
What is NEST?
NEST is the central pension scheme being set up by the Government. It will be run by a not-for-profit trustee corporation called NEST Corporation at arms length from the Department of Work and Pensions. It is an occupational defined contribution scheme aimed at low and medium income earners who do not have access to a company pension scheme and provides them with a vehicle to save for retirement.
From 2012, employers will be required automatically to enrol employees into an “automatic enrolment scheme”. Employers can choose to use NEST to meet their auto-enrolment duties under the new regime or they can use an alternative scheme established by the employer, which counts as a “qualifying scheme”.
What is a “qualifying scheme”?
Broadly, an employer's pension scheme is a "qualifying scheme" if it:
- is either an occupational or personal pension scheme;
- is a registered pension scheme; and
- satisfies the quality requirements set out in the Pensions Act 2008. These requirements differ according to the benefit structure of the relevant scheme.
For employers operating a defined contribution scheme, the quality requirements are as follows:
- For occupational DC schemes, the employer must make minimum contributions of at least 3% of the jobholder's "qualifying earnings" over a 12-month pay reference period. The total amount of contributions paid by the jobholder and the employer must be at least 8% of the jobholder's qualifying earnings over a 12-month period.
- For personal pension schemes (including group personal pension plans) the employer must make minimum contributions of at least 3% of the jobholder's qualifying earnings over a 12-month period. If the total contributions are less than 8%, the jobholder must have an agreement with the pension provider under which he or she is required to make up the shortfall, referred to as a "section 26 agreement".
In both scenarios, the employer must ensure that direct payment arrangements are in place, where the employer deducts contributions from the jobholder's earnings and pays these direct to the scheme.
It was originally anticipated that employers would be able to self-certify on an annual basis that their existing scheme meets the minimum quality requirements set out above. However, there are no provisions dealing with this in the relevant legislation at present.
It is a requirement that all “qualifying schemes” must not ask new joiners to make a choice and/or to provide information in order to become an active member. Therefore, somewhat worryingly, a jobholder who is automatically enrolled in a DC scheme will need to become a member of a default fund and cannot be asked to make an investment choice when being auto-enrolled.
Employers operating defined benefit schemes must ensure the scheme meets a "test scheme standard". This means that the pensions to be provided from the employer's scheme must be broadly equivalent to, or better than, the pensions which would be provided under a test scheme.
The test scheme is an occupational pension which provides that members will receive a pension for life beginning at the age of 65, at an annual rate that is 1/120th of average qualifying earnings in the last three tax years preceding the end of pensionable service multiplied by the number of years of pensionable service, up to a maximum of 40. It is also proposed that the test scheme must provide for pensions to be:
- revalued according to the final salary method referred to in section 84(1) of the Pension Schemes Act 1993; and
- increased annually in accordance with section 51 of the Pensions Act 1995.
Only the employer and the actuary can certify that a scheme meets the test scheme standard, and the employer cannot give a certificate in relation to any matter requiring calculation or which otherwise falls within the province of the actuary.
The test scheme standard will be modified in relation to career-average schemes. Such schemes will not count as qualifying schemes unless they give discretionary revaluation increases at a rate of 2.5% LPI (Limited Price Indexation) and this is provided for in the scheme's statement of funding principles.
Who does NEST affect?
The new regime, once fully implemented, will apply to all employers in Great Britain. They will be required automatically to enrol eligible “jobholders” into one of the schemes mentioned above. There is no minimum workforce requirement as is the case at present in respect of the stakeholder legislation.
A "jobholder" is defined as an employee or worker who meets the following three conditions:
- Works (or ordinarily works) in Great Britain under a contract. This will include temporary workers and agency workers, as well as directors who are employed under a service contract. Non-executive directors will therefore not be covered.
- Is aged at least 16 and under 75. However, in order to be eligible for auto-enrolment, a jobholder must be at least 22 and not have reached state pension age.
- Is paid “qualifying earnings” by an employer. These are earnings between £5,035 and £33,540, including bonuses, overtime and statutory maternity, paternity and adoption pay. Theses figures will be reviewed annually and revalued to allow for inflation. Although the regime is directed at low earners, jobholders earning more than the qualifying earnings band will be covered by auto-enrolment also.
In deciding whether a jobholder’s earnings are at a level which necessitates auto-enrolling the jobholder, an employer is able to use its normal pay cycle as the reference period.
Opting out of active membership
Jobholders who have been automatically enrolled will have a statutory right to opt out of whichever scheme they have joined. Jobholders who have opted out will, however, be entitled to change their minds and join the employer's scheme at a later date by giving the employer notice. However, they can only do so once in any 12-month period.
Employers will be required to re-enrol automatically every three years all eligible jobholders who opt out. This provision is designed to ensure that jobholders who have opted out on a previous occasion will need to reconsider their pension provision periodically.
Employers must not put pressure upon jobholders or seek to persuade them in any way to opt out.
Jobholders who are not eligible for auto-enrolment
Some jobholders will not be able to not meet the eligibility criteria for auto-enrolment. This will be for one of two reasons:
- they are aged less than 22 or over state pension age; or
- they earn less than £5,035 a year.
Jobholders aged less than 22 can opt in by giving their employer notice requiring the employer to arrange for them to become members of an automatic enrolment scheme. Again, they can only do so once in any 12-month period.
Jobholders who are regarded as low earners can also give their employer notice that they want to join a registered pension scheme, but this does not have to be an automatic enrolment scheme. There is however, no requirement for minimum employer contributions in such a scenario.
All employers will be under a duty not to take any steps (or make any omission) by which the jobholder ceases to be an active member, and/or the scheme ceases to be a qualifying scheme.
When will NEST come into force?
The requirement to auto-enrol will be introduced under a four-year staged process running from 1 October 2012 to 1 September 2016.
Employers will be separated into 43 bands according to size, with each band being assigned a particular monthly "staging date" from when they will be obliged to start the enrolment processes. Large employers will become subject to the enrolment duties before small employers. There will be several “open months” to allow for delays or administrative issues.
The Pensions Regulator will write to all employers approximately 12 months before their staging date so that the employer knows when automatically to enrol their eligible jobholders. Three months before the employer’s staging date the Pensions Regulator will write again to remind the employer of the new duties and the need to register. Early adoption of the auto-enrolment requirements wil
l be possible after 1 October 2012, and the NEST Corporation will have discretion to allow early adoption. But a number of conditions will apply; for example, an employer will need to certify to the Pensions Regulator that they understand the implications of early adoption and that they have a scheme in place.
What are the minimum contributions?
If an employer uses NEST, it will be required to meet the same minimum contribution requirements that will apply to an employer’s existing occupational defined contribution scheme, namely:
- Employer contribution: 3%
- Member contribution 4%
- Tax relief: 1%.
However, the contribution requirements will be phased in over five years, as follows- to see the table please click here.
There will be an annual contribution limit, set at £3,600 (increased with earnings from 2005 prices) and there will also be a ban on transfers into and out of NEST (except for certain prescribed cases); to be reviewed in 2017.
Charges will be levied on NEST members as follows:
- An annual management charge of 0.3% of a member's fund value.
- An initial charge of 2% of the value of new contributions.
Following the 2010 General Election, the Department of Work and Pensions announced that it was establishing a formal review of the pensions reforms (including NEST) before they are implemented. The review is focused on issues including the proposed scope of the auto-enrolment obligations, whether there should be an earnings threshold before auto-enrolment should apply, and whether establishing NEST is the most effective means of improving workplace pension saving. The review is scheduled to be concluded by 30 September 2010, the date by which the review’s report must be submitted to the DWP.