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Nest Pension Details

April 15, 2010 By admin Leave a Comment

In March 2010 the UK government started providing further details about the planned National Employment Savings Trust (NEST) pension scheme, for workers with no pension cover. It was announced that there are plans to levy a two percent charge on contributions to pay for the start-up costs of the pension. This is for the repayment of a rumored 600 million pounds that the state is spending to set up the scheme. This is in addition to the 0.3 percent annual management fee, and could well turn out to be a barrier to attracting savers.

The National Employment Savings Trust is projected to eventually reach six million members after its launch in 2012, and it may get to as much as 150 billion pounds in asset size by 2050. But this two percent charge may put a dent in those projections if savy investors catch on to the fact that the government is looking to charge higher fees than a standard occupational pension scheme. Would you want to save above the eight percent minimum when you know how your fees are going to get eaten away by fees?

As long as the two percent contribution charge is in place the potential returns of investors will be eroded. Will the pension scheme outperform a no load index tracker? If not then its tax advantages alone will struggle to make the pension stack up against direct investment by individuals because the pension would be starting out at 98% of the index fund and the compounding effect of that missing 2% over a thirty year period is massive.

Stakeholder and occupational pension funds charge between 0.5 and 1.5%, but NEST still thinks it will come out as the cheapest option over the long term because it has a low annual management fee of 0.3%.But the thing to realize is that these fees are not as important as the fact that people have to start saving. The National Employment Savings Trust is necessary to avoid a future pensions crisis.

Whilst NEST has been set up to address the problem of low-income workers, this is not the only problem faced by the United Kingdom’s pension industry. Another big issue is the generous final-salary pensions that are given to public sector workers. Whilst the nation is running a significant budget deficit, the final-salary pensions are unfunded guarantees and officially the current liability of public sector pensions is a massive £770 billion. Unofficially it is though to be a trillion. Whichever of these numbers you think is right, it is certainly a big burden for future taxpayers.

Another problem is the good health of the nation. People are living for longer. This is something that really came home to roost in 2007, when the number of people of state pension age was more than those under 16 for the first time ever. By 2050 Britain is expected to have over a quarter of a million people that are more than 100 years old, versus just 12,000 today.

The UK state sector needs to be review not only public sector employee pensions, but also the state pension. In particular the State Pension Age, the earliest age you can draw your State Pension, needs to be reviewed. It is not really a question of whether it will be revised upwards, but by how much. Whilst the traditional ages for the State Pension Age were 60 for women and 65 for men. The currently projected changes are as below:

  • Between 2010 and 2020 women’s retirement ages are increasing to 65
  • Between 2024 and 2026, retirement ages for men and women are increasing to 66
  • Between 2034 and 2036, retirement ages for men and women are increasing to 67
  • Between 2044 and 2046, retirement ages for men and women are increasing to 68

The State Pension is made up of both the Basic State Pension and the Additional Pension. The Basic State Pension is the flat-rate pension that is paid out to those that have paid enough National Insurance. The way it is calculated for those that reached State Pension Age on or after 6th April 2010 is that they get the full rate of the Basic State Pension if they have paid in for 30 years, and a proportionately lower percentage if they have paid in for less years i.e. someone you only paid National Insurance for 10 years would get one third of the Basic State Pension. For those that reached your SPA before 6th April 2010 the rates of payment are different. What happens to this basic pension, and the way it is calculated, remains to be seen.

Clearly NEST is just piece of the pension puzzle, and there is a lot of work to be done to avert a crisis. Getting old gracefully could be an increasingly elusive target if we do not start making some changes now.

Filed Under: NEST Tagged With: Basic State Pension, National Employment Savings Trust, NEST, nest pension, State Pension

What are NEST pensions?

January 9, 2010 By admin 1 Comment

The National Employment Savings Trust (NEST) is the name of a UK pension scheme that is scheduled to come into effect in October 2016. It was previously known as the Personal Accounts pension scheme, and is aimed at encouraging low to middle income workers to save for their retirement. Its target is to have two million employees making contributions by late 2016, with salaries of the contributors in the range of £15,000 to £30,000.

The UK government set up the Personal Accounts Delivery Authority (PADA) to oversee the introduction the NEST pension. Whilst PADA is responsible for designing and introducing the infrastructure for NEST, the running of the pension will be handed over to and run by a new trustee corporation called NEST Corporation. A board with independent trustees is expected to be set up to oversee NEST Corporation once the pension is introduced. The regulator is likely to be the Pensions Regulator or the Financial Services Authority.

NEST is just one of the schemes employers can use to fulfill new duties under the workplace pension reforms due to come into effect from 2012. One concern people have is that it will become the default choice, and employers will use it as an excuse to end more generous schemes.

The history of these reforms dates back to 2005 when the independent Pensions Commission published “A New Pension Settlement for the Twenty-First Century”, which recommended changes to reform the pension system. Following this a number of changes were made to the UK pension system via the Pensions Act 2007. This related to changes in the state pension system, and then in December 2006 a further paper was published that related to personal pensions. This resulted in the Pensions Act 2008.

The Pensions Act 2008 focused on ways to encourage individuals to save. One of the biggest changes is placing an obligation on employers to enroll their staff in a pension scheme, and make a contribution to it. The Pensions Act 2008 allowed for the creation of a new pension scheme as a suitable workplace scheme for low to middle income earners, and the remit of the Personal Accounts Delivery Authority was broadened under the act to enable it to establish the infrastructure for the scheme. The Personal Accounts Delivery Authority must come up with the most suitable product for moderate income workers and determine the best strategy to communicate with them.

PADA is one of three bodies under the Enabling Retirement Savings Programme that has overall responsibility for delivering the workplace pension reforms in the Pensions Act 2008. The other bodies are the Department for Work and Pensions, and the Pensions Regulator.

A simple summary of NEST is that it is a personal pension administered by employers. It is planned that employees will be automatically enrolled into a NEST, unless they earn less that the primary tax threshold, or they already contribute to a pension that provides equal or superior benefits to NEST. The underlying investments to be offered are yet to be determined, but they likely to be low cost, with the government pushing for 0.3%. The pensions can be transferred when employers are changed, and accessed after the age of 55. At the time the pensions are accessed there will be an option to take a 25% lump sum tax free. The current plan is that employees will pay 4% of earnings, and employers 4% (1% of which will be via basic rate tax relief).

NEST is a much needed scheme in the UK as estimates suggest that over 10 million people either have inadequate or zero pension provision. The first stab at correcting the problem was the introduction of stakeholder pensions in 2001. Whilst these did a good job of lowering pension fund costs they did not manage to encourage most people to make contributions. It is planned that NEST contributions will not be compulsory, but employers will be responsible for encouraging employees to opt-in.

The National Employment Savings Trust can be compared to Australia’s superannuation scheme. In the mid-1980s Award Superannuation was introduced, where a 3% employer superannuation contribution to employees was made in lieu of a 3% wage increase, and then in 1992 the Superannuation Guarantee Charge was introduced which determined that compulsory employer contributions must be made, with voluntary employee contributions. Employers must pay a minimum of 9% percent of employee earnings under the scheme. One interesting point is that 75% of Australians have balanced superannuation funds which give them exposure to international stock markets. There are some differences to consider. One is the pressure on employers to make significant contributions, and the other is the fact that Australia had all this set up in 1992. One imagines that low to moderate income earners in Australia will be better off than their UK counterparts when it comes to retirement. The NEST can’t come soon enough.

Filed Under: NEST Tagged With: National Employment Savings Trust, NEST, PADA, Personal Accounts, Personal Accounts Delivery Authority