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.