Summarised regulatory notes for NEST

NB. These are notes on our current understanding and not a definitive detailed report on NEST.  The rules for NEST are changing rapidly and it is highly recommended that regular updating of the company’s knowledge is undertaken.

Definitions

  • A Micro employer is an employer with less than 50 Staff.
  • National Employment Savings Trust (NEST)
  • NEST – the government run scheme
  • Exempting scheme – a pension that an employer can set up as an alternative to NEST that gives both the employer and employee more options

State pension

  • 06/04/2010 State Second Pension (S2P) stops. A flat-rate pension “funded” by earnings-related NI contributions will start. However, whilst S2P is stopping, the National Insurance contributions will remain the same.
  • 06/10/2010 NEST starts.

NEST

Three parties are working together to implement these workplace pension reforms:

  • The Department for Work and Pensions (DWP) is responsible for the policy and legislation.
  • The Pensions Regulator (TPR) is responsible for maximising employers’ compliance with their new duties.
  • The Personal Accounts Delivery Authority (PADA) is responsible for designing and introducing NEST and setting up the NEST Corporation.

Rules and eligibility

It will be a criminal offence for employers not to have a pension scheme even if there are no eligible employees.

Employers must have a pension scheme available in case any employee chooses to be in it.

The employer can either sign up for the Government NEST scheme or set up an exempting scheme.

Auto enrolment will be at age 22 – not before or after, but at age 22. i.e. on 22nd birthday and to a maximum of the state pension age. It will be the employer’s responsibility to prove the employees date of birth to ensure that employees are not trying to avoid enrolment. Employees can enrol by choice, but not over the age of 75. This could mean that a member of staff may need to be enrolled or re-enrolled daily, an admin headache. However, employers have a three month window in which to auto-enrol new members of staff, but contributions must be backdated and the late start could affect the ability of the employee to opt out and get a refund of contributions, see below.

Employees aged from 16 to 22 and those between State Pension age and 75 who are earning more than £5,035, will be able to opt in to their employer’s workplace pension thus qualifying for the compulsory minimum employer contributions.

An eligible worker is an employee aged between 22 and state pension age and earning above the income tax personal allowance (£7,475 in 2011/12). Yet contributions become payable on earnings over the National Insurance primary threshold (£7,228 in 2011/12)!

Those earning below the income tax personal allowance may opt in to their employer’s workplace pension, but the employer will not be required to make a contribution, but may do so if they wish.

Employers must provide Pension information to employees at the auto enrolment.

Employers MUST NOT give advice – This would be an offence and fines will be applied.

Employers cannot advise anyone to join, but they must auto enrol all eligible employees.

There is no ability to transfer a pension fund in to or out of NEST.

Costs – 4% employee 1% Tax relief 3% employer = 8% of band earnings

Band earnings are from £5,715 and £33,540 (2010/11). Just to help, these are different to tax bands.

The changes are planned to start from October 2012. The plan is to stage in enrolment over a period of time, starting with large employers. To help employers adjust gradually the plan is to phase in the employer contribution levels – starting at 1%, then 2%, and finally 3%. The employee’s contribution will be phased in the same period.

Employees have to be in the scheme to have the option to opt out.

In order to opt out the employee must contact the scheme administrator (not the employer) for the paperwork, but must return the form to the employer for the employer to return it to the administrator!

The employer must re-enrol the employee three years after the original auto-enrolment date. The employee can opt out again if they wish, but will be re-enrolled again under the three yearly auto-enrolment rule.

The employee cannot have the 3% employer contribution as a wage, because this would be considered “an inducement by the employer”.

There is an “opt out” window of currently 60 days, during which the contributions would be refunded as if the employee was never in the scheme. Otherwise, if the window is missed, the contributions cannot be refunded until age 55.

The Pensions Regulator (TPR) will be writing individually to all employers at around 12 months ahead of inception and again at three months in advance of their automatic enrolment start date to inform them when they need to take action and what they need to do to comply.

The Personal Accounts Delivery Authority (PADA) will provide information to the prospective employer customers about NEST, formerly known as personal accounts.

There are 3 phases and 42 staging dates within those phases. It is imperative that the employer starts auto-enrolment on the correct one stage out the 126 possible dates.

In order to conform, TPR require initial registration, annual returns, re-enrolment registration and detailed records to be kept for at least six years.

Our compliance body are willing to go to each company we set up with an exempting pension scheme and rubber stamp their pension scheme.

Pause for thought –

Setting up a NEST scheme will be highly restrictive for the employee and potentially an HR headache for the employer. Setting up an exempting scheme will allow for greater flexibility for both employer and employee with the employee having far more options open to them. It should also make life easier for the employer and the HR dept.

The Government has openly said that it would prefer companies to take out an exempting scheme rather than use the NEST scheme. This is because they see the NEST pension as a fallback position and are aware that it is unlikely to be as well administered as a scheme run by a pension provider and also because the investment fund options are likely to be Significantly better in exempting schemes..

When the Government set up the Stakeholder legislation they didn’t put anyone in place to police the introduction and ongoing regulation of the pensions. They have already earmarked 400 employees to police the NEST legislation.

Since A-day in April 2006 there have been around 700 legislation changes to pensions.

The Pensions Act 2008 puts into law the reforms to the private pension system set out in the White Paper, “Personal Accounts: a new way to save” published in December 2006. These reforms build upon the Pensions Act 2007 and are aimed at enabling and encouraging more people to build up a private pension income to supplement the money received from their basic State Pension. The words for this act are only now being written.

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