What are NEST pensions?

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.