The People Bulletin

When does NEST come in?  Don’t the new rules mean I will have to use NEST? Is something happening with pensions, I didn’t know?

These are all questions I have heard over the last few days. There are so many misunderstandings and rumours circulating at the moment, it’s no wonder people are confused. So what is the truth?

The Essential Facts

Workplace Pension Reform

It has been headline news for months, if not years, that millions of people are not saving enough to have the income they want when they retire. In 1901 there were 10 people working for every pensioner in the UK.  2010 figures show that there are now only three workers for every pensioner. The government has made it clear that people must take responsibility for their own retirement and start saving as early as possible. 

The Pensions Act 2008 laid the foundations for a fundamental reform of workplace pensions, requiring every employer to automatically enrol their workers into a qualifying pension scheme, if they are not already in one, and to contribute to that scheme.

Automatic Enrolment

Under the reforms, employers must automatically enrol eligible employees into a qualifying workplace pension scheme. This could be their existing workplace pension scheme, another pension provider or NEST.  Any employee not wanting to save for their retirement will have to make an active choice to opt-out.

NEST (National Employment Savings Trust)

NEST is a new workplace pension scheme open to employers of any size.  It has been designed as an option for those largely new to pension saving. It is available for any employer who chooses to use it and is intended to provide a straight forward means by which employers can meet their new duties.

What this means in practice

The government’s message is clear: The law on workplace pensions is changing and every employer will have to act. The new duties come in from October 2012 and will be phased in gradually over the following four years. This timescale is intended to give employers time to get prepared and have systems in place. 

Employers will have to:

• choose a qualifying workplace pension scheme;
• enrol eligible workers into that qualifying scheme;
• make a minimum contribution towards workers’ pensions; and
• automatically re-enrol, every three years, eligible jobholders who have left a qualifying pension scheme.

There will be employers who already have a pension provision for their workers, and this will often match or exceed the minimum requirements of the new duties. In these cases employers may simply need to check that the minimum requirements are covered in their existing processes.

With 10million individuals expected to be eligible for automatic enrolment, pension providers will be processing an unprecedented amount of workers. To ensure that their own automatic enrolment process works smoothly and that workers are automatically enrolled on time, employers must approach their chosen pension provider in plenty of time to ensure their required scheme is set up before their staging date.

The staging date

Although Automatic Enrolment starts to take effect in October 2012, it won’t affect all employers at the same time.  Each employer will have a date on which they have to begin the process of automatic enrolment. This is referred to as the ‘staging date’. The largest employers (all those with more than 50 people in a PAYE scheme) are staged in line with their size from October 2012 to July 2014. Those employers with between 1-49 people in their PAYE scheme will be staged between August 2014 and February 2016.

Employers can find out their exact staging date by checking The Pensions Regulator website. 

Eligible workers

From 2012, employers will have to enrol into a workplace pension, those workers who:

• are not already in a workplace pension scheme;
• are at least 22 years old;
• have not yet reached State Pension Age;
• earn more than the minimum earnings threshold (currently £7475 a year); and
• work, or ordinarily work, in the UK.

A qualifying pension scheme

Employers need to choose a pension scheme that meets certain Government standards. To qualify, minimum contributions must be made into the scheme, or it must provide a minimum rate at which benefits will build up. Options available to an employer when choosing their scheme are:

• use an existing scheme if it qualifies;
• amend an existing pension scheme to meet the qualifying criteria – employers with an existing pension scheme that does not meet the minimum qualifying criteria may decide to amend the scheme so that it does;
• set up a new pension scheme which meets the qualifying criteria; and /or
• use NEST – any employer can choose to use NEST for some or all of their staff;
• an employer can also use a combination of these options for different areas of their workforce.

Further employer responsibilities

As well as choosing a qualifying pension scheme and automatically enrolling workers, employers have other responsibilities to consider.

Communicate the changes

Regardless of the scheme the employer chooses, they must give their workers factual information such as: that they are going to be enrolled into a pension scheme; what that pension scheme is and the amount of contributions they will have to pay.

Contribute to their workers’ pensions

If an employer chooses a qualifying pension scheme that works on a defined contribution basis they will be required to make minimum contributions on behalf of some or all of their workers.

The phasing in of employer payments means that employers must contribute a minimum of 1% of their employees’ salary from their staging date until September 2016, 2% until September 2017, and 3% thereafter.  This is on top of tax relief, and a 4% employee contribution which must be paid across by the employer

Register with the Pensions Regulator and keep records

When an employer has completed the automatic enrolment process they will then have to register with The Pensions Regulator.  Employers will also need to keep specific records about workers and their pension arrangements for a minimum of six years.

Opting out and rejoining

Workers can opt-out of automatic enrolment if they want to.  They have a month to opt out from the day they officially become a member of the scheme.  Any payments made during this time will be refunded.

Workers can choose to leave the scheme at any time, however any payments made after the first month will not be refunded and will remain in their pension pot.  Workers who have opted-out can re-join at a later date if they wish. 

Every three years, employers must also automatically re-enrol workers back into the scheme so long as they are at least 22 years old, below State Pension age and are earning more than the minimum earnings threshold. 

NEST

NEST is a new, straightforward workplace pension scheme, introduced as an option for employers to use to fulfil their automatic enrolment obligations.  It is open to all workers, including those who may not have had access to a pension arrangement before.  Employers can choose to use NEST on its own, or alongside any other existing scheme they have in place.

Act now

According to research undertaken by The Chartered Institute of Personnel and Development, 53% of workers in this country have no knowledge of the pension reforms coming in from next year. 

And judging by the questions I have been asked, there is still confusion from those who have some inkling that changes are coming in. 

Act now! The Pensions Regulator website includes online tools and a 7 step guide giving advice about how to prepare for automatic enrolment.  And even if you do not choose to use NEST, the NEST website too is a great source of information and has summarised perfectly the actions employers need to take to get ahead of the crowd:

• Find out when your organisation needs to comply.
• Understand which workers you need to enrol and make contributions for.
• Consider whether you can use your current scheme (s) to comply with your new duties.
• Think about what you might need from any new scheme.
• Be ready for minimum contributions.
• Provide accurate and up-to-date information to the qualifying scheme.
• Let your workers know what’s happening.
• Understand how opting-out works.

And finally, to remove any doubt, the answers to the questions at the top of this page are:

• If you choose to use NEST as your workplace pension scheme it is open for business now.
• NEST is one of a range of workplace pension schemes available.
• Yes, workplace pensions are changing, but you knew that already didn’t you?