News
Reforming workplace pensions - 31.08.10
Workplace pension reform - an overview
What is the NEST pension scheme?
Under the government's workplace pension reforms, employers must auto-enrol employees (with limited exceptions) into a qualifying pension scheme within a strict timescale.
The National Employment Savings Trust (known as NEST), is a centralised registered occupational pension scheme established by statute specifically for this purpose and is open to any employer. It is intended to be a simple, low cost pension scheme primarily aimed at low to moderate earners. As such, it has some special rules and restrictions that mean it is not as flexible as most other pension schemes.
NEST, however, is just one of the qualifying pension schemes that employers can use to fulfill their new pension obligations, with employers able to choose the scheme(s) and structure they think are most appropriate to meet the needs of their workforce. This could be NEST, their own quality pension scheme(s) or a combination of both.
What are the government's plans for workplace pension reform?
Beginning in 2012, the government will be implementing workplace pension reforms that impose new duties on employers to make mandatory pension provision for their employees (known as workers).
At the core of these reforms is a new requirement for employers to include certain employees (known as eligible jobholders) in a pension scheme automatically (known as auto-enrolment) within a strict timescale.
The employer's chosen pension scheme(s) must pass a quality test to be a qualifying pension scheme. The test will be based on a minimum level of contributions or defined benefits.
Why is the government making pension reforms?
The government's package of reforms for both workplace and state pensions are a response to the widely reported 'pension crisis'. They are intended to address the impact of changing demographics and provide sustainable long-term pension framework in the UK.
The key driver behind these reforms is a concern that, particularly as average life expectancy increases, many individuals are not saving enough to provide adequately for themselves in old age. Without the reforms, there is a danger that the burden on the State could become unsustainable over time.
The review of automatic enrolment - what does it mean?
The government has confirmed that it is committed to introducing auto-enrolment. The review will consider whether the current scope strikes an appropriate balance between increasing private pension saving without imposing undue costs and burdens on individuals and their employers.
The review will conclude by 30 September 2010 and will be lead by Paul Johnson (Institute for Fiscal Studies), David Yeandle (Engineering Employers Federation) and Adrian Boulding (Legal & General).
They have been tasked with reviewing certain specific areas including:
» Whether the underlying policy objective of increasing private pension saving would
be better delivered by changing which workers are auto-enrolled.
» In looking for the correct group to automatically enrol, the review may explore:
» The earnings threshold, above which automatic enrolment applies;
» The introduction of a de minimis level for contributions before automatic
» enrolment applies;
» The age group to which automatic
enrolment should apply;
» The size of employer to which automatic enrolment should apply;
» Whether employees should be automatically enrolled on the day they start work
or a later date.
» Whether establishing the NEST scheme is the most effective solution, or if
existing pension providers could serve the workers being automatically enrolled.
The coalition government has concerns about the impact of means-tested benefits, particularly on those workers who are enrolled when they are older, or those who have low earnings. In addition, the cost of auto-enrolment on small and micro employers will be examined to ascertain if it imposes excessive burdens.
If the review decides to significantly reduce the number of workers enrolled then they will also consider whether establishing NEST is the most effective way to deliver increased workplace saving, or if the current pensions industry can provide services to the remaining employers and their workers.
The above comments are based on our current understanding of the regulations and we will have to wait until the end of September to see if anything changes.
A version of this article by Mike Reid, Corporate Development Manager with Kudos Financial Services, appeared in Hr Network Scotland's September/October
2010 edition.