Thursday 15th July 2010

NEST - Implications for Employers

National Employment Savings Trust (NEST) – the Government’s solution to better future saving - what does this mean to you as an SME?

As part of the Pensions Reform Act 2008, the Government will be introducing a new regime in 2012 where employers will need to automatically enrol their staff (new and existing) into a ‘qualifying pension scheme’ and will include a minimal level of employer contribution. Employers will be staged into the new system dependent on number of employees (sourced by PAYE) with larger organisations first, and companies of up to 250 staff being required to phase in their ‘qualifying scheme’ from March 2013.

There currently is no legal requirement for employers to contribute into a Pensions Scheme, and the introduction of the mandatory stakeholder scheme in 2001 did not have the anticipated uptake of pension schemes as hoped. As such there is a big concern about an ever increasing number of people reaching retirement age without any financial support for the future.

NEST is proposed as the alternative, new, low-cost pension scheme, targeting millions of low and moderate earners into saving for retirement. It outlines the basic requirements for a ‘qualifying scheme’, of which employees do have the option to opt out of should they not want to participate, but there will be automatic re-enrolment every 3 years. This scheme is as follows:

• For employees between the age of 22 and state pension age
  
• Defined contribution: total contributions of at least 8% with a minimum of 3% employer contribution
  
• Contributions will be based on qualifying earnings between £5,035 - £33,540 (including salary, overtime, bonuses and commissions)

The Pensions Regulators will ensure that employers comply with the new regime so it is integral that employers are informed well in advance of the proposed dates, what their obligations will be around this and how to start preparing for the implementation.

Implications for SME’s

Whilst most of our clients have quite some time before required implementation, it will be important now to begin the review current pension arrangements on offer to ensure you are financially and administratively capable to take this on and can meet the requirement as set out by the Pension Regulations.

Many of our clients do not have a company pension arrangement in place and may only offer a stakeholder pension, the uptake of which is minimal and as such a minimal financial and administrative cost to the employer. What employers must be aware of is that the regulations do not allow employers to offer inducements to employees to opt out and as the first organisations start to implement this process, we will potentially see the pitfalls of introducing the scheme, including adverse reactions by staff to reductions in pay, employers having to pull their purse strings and source finances from various avenues, and increasing costs and time in administration of a pension scheme.

Introducing a new pension scheme will also amount to a changes in terms and conditions of employment, and as such will require consultation and agreement to new terms. Therefore a review of what is currently stated around your pension’s arrangements in your contracts could allow you to introduce some flexibility for when the time comes to phase in the new scheme.

As we get closer to the proposed staging dates, Gravitate will be able to provide support and advice to help manage the consultation process and ensure an easier progression into the new regime. Meanwhile, please look out for our blog and future memos regarding updates and review of current practices in relation to NEST.