Most people agree that the state cannot be expected to provide for us in our retirement years to the level of income that allows us to lead the lives which we and our families desire, and that is why private pension provision by individuals is generally necessary.
All political parties acknowledge this and NEST was initially designed by the previous Labour administration as the solution to the fact that large numbers of employees do not currently make any private pension provision.
The big difference with NEST from any of the previous solutions presented by Government, for example, stakeholder pensions, is that whereas up to now there has been an almost voluntary code as to whether employers have to offer their staff a pension scheme and then whether this is actively promoted, the premise of NEST is built around compulsion.
According to the facts known at the current time, it will be compulsory for employers to automatically enrol all eligible jobholders, a government term for employees who are aged 22 and over and who have qualifying earnings, into a Qualifying Pension Scheme when the employee joins the company (or at the date the new legislation starts if earlier). If the employer does not have a Qualifying Pension Scheme for the employee to join then the employee must be enrolled into NEST.
It is then down to the jobholder to decide whether they want to stay in NEST or opt out and employers will be required to re-enrol any employees who opted out on the third anniversary of their decision when the process of deciding whether to stay in or opt out again starts afresh.
Contributions due to NEST will ultimately be at the level of 3% of qualifying earnings from employers and 4%, plus 1% tax relief, from employees. Employers are responsible for the deduction of this contribution from net pay and the submission of the total payment to NEST. Qualifying earnings are currently defined by NEST as earnings between £5,035 and £33,540 (based on 2006 figures) within a 12-month pay period to include basic salary or wages, commission, bonuses, overtime and certain statutory payments, for example, maternity, paternity or sick pay.
For many employers, this definition of qualifying earnings will be a new calculation that they need to undertake and, if they currently maintain a pension scheme for employees, will mean they have to complete a regular comparison of whether the contributions paid to the current scheme are at least equivalent to those due to NEST for the same period. If not, they will be required to make changes to the level of their contribution, paying the extra into either the existing pension scheme or NEST.
It is clear from these very basic rules that the administrative requirements of NEST are going to be extremely onerous for almost all employers. In fact, there will be very few employers that satisfy all of the NEST exemptions for all eligible jobholders and those that do are more than likely going to be within the large company community. Indeed, with a large number of SME employers, especially those with fewer than 50 staff, not currently providing pensions at all there are going to be tremendous administrative and financial impacts within this sector of UK plc.
This is partly why the announcements around the introduction of NEST include the phasing in of such arrangement so that the SME community has time to react. However, the biggest current problem faced by any employer with NEST is the fact that none of the rules is as yet set.
As with almost all things inherited by the coalition Government, NEST is currently subject to an independent, government commissioned, review. This review is expected to feed back to the Government this month and Steve Webb, secretary of state for work and pensions, acknowledged in Parliament on 6 September that the full review will be published this autumn.
In summary the options that are available for Webb are as follows:
* To push on with NEST as it is known today
* To keep the timetable the same but amend some of the eligibility and administration conditions, or
* To push the introduction date back to allow more time for a far-reaching review to be completed.
It is widely anticipated by most industry insiders that the recommendation will not be the first of these but opinion is divided between the latter two options.
To date, the planning for NEST has been an extremely expensive exercise for the Government and, by association, UK taxpayers. However, so far, we have seen no reluctance within the coalition to bring a halt to something that they clearly feel is not fit for purpose in the current harsh economic times we find ourselves in. Given these economic conditions and a need to support and encourage private sector employers, we could see a postponement of NEST.
With only 24 months until the proposed launch date it is certainly the case that the continued speculation and confusion surrounding NEST is leaving many HR and finance directors dazed and confused. With a recent Association of Consulting Actuaries (ACA) survey among 210 large private and public-sector employers finding that 64% of them believed the rules on re-enrolling people who had opted out should be changed and 73% thought the earnings basis used to determine contributions should also be changed, it seems fair to say that the feeling among smaller companies can be expected to be even stronger.
In fact in our experience many SMEs are not yet aware of the basic premise of NEST and so are a long way from making the changes necessary to implement such a scheme within their business. With every day that goes by leaving UK plc with less time to implement the fundamental business reviews that will be necessary to adapt their HR and financial structures to comply with this piece of legislation, all employers should be taking the necessary actions now to educate themselves in respect of the post 2012 pensions landscape.
Neil Gough is client services director, Creative Benefit Solutions
