"From October 2012 all employers need to set up and fund a Qualifying Workplace Pension Scheme"

Employers' Guide

Changes to workplace Pensions - NEST and Auto Enrolment - What Employers need to know

This guide is designed to provide your company with an overview of the changes being made to workplace pensions, and the impact they will have on your business.

What is auto-enrolment?

This is a process whereby employees are automatically entered into a pension scheme without any form of application on their part. Many employees fail to join valuable employer sponsored pension schemes because they first have to initiate an application process. Auto-enrolment is meant to overcome this obstacle.

When the pension reforms are introduced in October 2012, all eligible employees will have to be compulsorily auto-enrolled into a qualifying pension scheme. Employers will be able to choose which qualifying scheme to use, including the new National Employment Savings Trust (NEST). All qualifying schemes must meet minimum standards, either of the benefits provided or the amount of contributions paid to them, and must also facilitate auto-enrolment for all eligible employees who have not already joined an arrangement and for all new employees when they become eligible.

What is the National Employment Savings Trust (NEST)?

In a move to encourage saving for retirement, the Government is introducing a new low-cost saving scheme - National Employment Savings Trust (NEST). It is to be introduced from 2012 and employers who do not offer access to a suitable alternative pension arrangement will be able to use personal NEST accounts for their employees.

Employees will be automatically enrolled in the scheme but will have the opportunity to say they do not want to join. They will also be able to come out again at a later date if they want to.

Contributions will be paid by employees and employers and invested in a range of target date default funds. At retirement, the accumulated fund will be used to provide an income for the member's lifetime.

Members of the scheme and their employers will be able to pay additional contributions above the specified minimum levels. However, there will be an overall limit on the total amount that can be invested in the scheme each year. At present this limit has been set at £3,600 p.a.in 2005 terms - £4,200 currently in 2011.

The scheme will be run by a board of trustees. The trustees will run the scheme independent of Government and the scheme will be regulated by The Pensions Regulator in common with all other occupational pension schemes

Will I have to auto-enrol my employees into the National Employment Savings Trust (NEST) in 2012?

You will have to auto-enrol all employees into the National Employment Savings Trust (NEST) - if they are not already members of an exempt employer sponsored defined benefit/defined contribution pension scheme.

An eligible employee is one who is between 22 years of age and State Pension Age [66 from 2020] and earns more than a certain minimum : earning above the income tax personal allowance (£7,475 in 2011/12). Contributions become payable on earnings over the National Insurance primary threshold (£5,715 in 2010/11).

Employees who are exempt from this will be:

• A member of your final salary pension scheme that meets certain minimum standards, or
• A member of your money purchase pension scheme and there is a minimum level of employer contributions, or
• A member of your group personal pension scheme or stakeholder pension scheme and there is a minimum level of employer contributions.

If an eligible employee is not an existing member of one the schemes mentioned above, he/she must be either auto-enrolled in to NEST or in your employer sponsored pension arrangement, provided that the arrangement meets certain minimum conditions as to the benefits it pays or the level of contributions paid to it.

At present, although employers can auto-enrol employees into an occupational DB or DC pension scheme, they cannot auto-enrol employees into a Workplace Personal Pension (WPP). However, from 2012, employers can choose to auto-enrol eligible employees into either an occupational pension scheme or a qualifying Workplace Personal Pension scheme.

There is no requirement to auto-enrol an employee who does not meet the eligibility conditions.

I already have a Group Personal Pension Scheme (GPP) for my employees. Will I still have to put them into the National Employment Savings Trust (NEST)?

Provided your scheme meets certain minimum criteria with regard to the level of contributions, you will not have to take any action for those who are already members.

From 2012, employers can choose to auto-enrol their employees into a qualifying GPP scheme; these will be known as AEPs - auto-enrolled pension schemes.

I already have a Group Personal Pension Plan (GPP) for my employees. Can I drop this in favour of the National Employment Savings Trust (NEST)?

Yes. You may decide to close your GPP at some time in the future. You should first check what contractual rights your employees have before withdrawing this plan and there will be a consultation process you must go through.

Unless you replace it with another exempt arrangement, you will have to enrol the affected employees into the National Employment Savings Trust (NEST).

If you withdraw this scheme before 2012, you may need to meet access requirements for stakeholder pension schemes. If you have five or more employees, you must offer access to a stakeholder pension to all your relevant employees.

Auto Enrolment Timetable: Staging Dates

Where a worker is automatically enrolled in to a defined contribution (DC) scheme or NEST, there will be a minimum contribution of 8% of qualifying earnings, of which the employer must pay a minimum of 3%. If the employer chooses to pay the minimum 3%, the worker will pay 4%, with a further 1% paid as tax relief by the government. Contributions are based on earnings above the income tax personal allowance (£7,475 in 2011/12). Contributions become payable on earnings between the National Insurance primary threshold of £5,715 in 2011 and the ceiling of £38,185.

However, these minimum contribution levels will be phased in between October 2012 and October 2017:

• October 2012 to September 2016 - total minimum of 2% of qualifying earnings with at least

    1% from the employer.

• October 2016 to September 2017 - total minimum of 5% of qualifying earnings, with at least

    2% from the employer.

• From October 2017, total minimum of 8% of qualifying earnings, with at least 3% from the employer.

The Implications for Employers

 NEST and Auto Enrolment is due to be introduced in October 2012. We have a number of concerns for our corporate clients with the current proposals;

-          Due to go live at midnight on the 1st October 2012. The government’s reputation on the deployment of large IT schemes leaves something to be desired and there may be significant disruption to UK Plc.

-          All employers will be forced to provide contributions of 3% of their salary roll into the scheme – as payroll is generally the largest single cost for the majority of employers this will mean significant additional expense. This will be the case even for employers who currently have relatively generous pension schemes, as the majority presently have take up rates of no more than 60-80% or so of the eligible workforce.

-          The definition of “pensionable earnings” for NEST/Auto Enrolment is essentially all earnings, so includes variable elements of pay such as overtime/bonuses and commissions etc. Most employers don’t currently include pension variable pay elements, so again this indicates greater costs. Additionally the fact that these elements of pay vary week to week, month to month, will inevitably mean significant additional work for payroll administrators.

-          The NEST scheme will only cover earnings between £5,715 and £38,185 per annum - a bandwidth of £32,470. Consequently there is a risk of having a two tier pension system for lower and higher earners with all the additional employer administration this will incur.

 -          Employers have tended to start pension schemes either as an act of benevolence to staff and/or to enhance their position as an employer of choice, thus aiding both recruitment and retention. In either event, these advantages will be significantly eroded by the introduction of NEST and employers will need to consider what actions they need to take both to contain costs and to maintain their competitive edge.

How will NEST/Auto Enrolment affect my business?

For most UK employers, even those who currently offer staff pensions, it is inevitable that this legislation as it stands will result in both disruption and greater costs; why?

• Typically staff related expenditure represents around 85% of the average UK employer's costs. Any increase in staff costs will have a marked effect on profits.
• In our experience, even employers with generous pension schemes (defined as 6% or more in employer contributions) do not achieve full take-up from all eligible employees.
• The definition of eligible earnings for NEST/Auto Enrolment is wider than most employers currently use.
• Most companies’ eligibility criteria for existing schemes will currently exclude large sections of the workforce who will become immediately eligible for NEST.

So what steps can I take to minimise the impact of Nest/Auto Enrolment on my business?

There are strong reasons for you to act in advance of the arrival of NEST/Auto Enrolment. Acting now, perhaps by using a mixture of both salary exchange and part of any future employee pay rises, could help you to manage out all the initial shock of the costs associated with the advent of NEST/Auto Enrolment.

Furthermore, if you do nothing more than adopt NEST/Auto Enrolment in 2012, your employees will rightly view this as being something you simply had to do and therefore see no benevolence in the act. The additional cost you will inevitably be incurring when NEST/Auto Enrolment starts will buy you nothing in terms of your employees’ perception of you.

Will it be better to switch to NEST when it arrives or should we ensure that our current scheme, or any new scheme we are considering, is exempted? In other words, should we be ahead of the curve?

There are a number of reasons why we believe most quality employers will want to offer their staff an exempted scheme rather than adopt NEST:

-          NEST won’t serve the needs of higher earning employees well, as the maximum contribution is just £3,600 p.a. [£4,200 in 2011]  Consequently, those employees eligible for total contributions in excess of this amount will require some form of “top-hat” scheme. This means having two arrangements, rather than one, causing more administrative headaches for employers than would be needed under an exempt scheme which can accommodate the diverse needs of all employees.

-          NEST will have a transfers moratorium – preventing employees from moving money in or out during the first 5 years until 2017. Employees generally want to rationalise their different pension “pots” into one account, this will still be possible with an exempt arrangement.

-          NEST starts at midnight on the 1st October 2012. While there will be some “phasing in”, the Government’s track record on large IT projects is patchy at best and many payroll providers may also struggle to cope. There is a serious risk of business disruption while this settles down.

-          Exempt scheme are likely to offer very wide investment choices to employees. NEST in contrast will have a  limited fund choice - 45 default target date funds, one for each year of retirement managed by State Street, UBS and Credit Suisse. State Street Corporation will manage the administration of NEST funds. Those employees who have previously taken more control over their investments may not want to lose their options.

 -          Exempt schemes may be able to utilise salary exchange for member contributions, meaning the National Insurance saved by the employer can be used to offset the cost of contributions into members plans and the admin/servicing charges

Ultimately we believe exempt schemes will be adopted by those employers who want to derive value for money from their pensions spend; after all, if you are only offering the legislative minimum required under NEST, then you have no way of delineating your pension offering from other employers doing the same. A good quality exempted scheme need not cost the employer any more money, and indeed has the possibility of saving money in that such a scheme may include remuneration charges that enable you to meet some or all of the cost of employing scheme advisers and administrators to deal with much of the member/employee communication work and the support needed.

Actions to consider

We believe that the majority of employers who currently offer a good quality staff pension arrangement will be better served by looking for exemption from the requirement to provide NEST. Achieving exemption will:

-          Minimise the impact of disruption, as the scheme is already established.

-          Enable you to promote an arrangement which, even if it doesn’t have larger contributions, has greater choice and flexibility. This will enable you to maintain a competitive edge against your peer group.

-          Promote loyalty through a clearly company branded individual offering.

-          Offer reduced administration through the ability to base contributions on a less variable definition of pensionable pay.

-          Introduce salary exchange to mitigate some of the contribution and administration costs of an exempt scheme.

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