Services: Pension auto-enrolment and NEST pensions key facts

Pension auto-enrolment and the advent of the Governments NEST pension scheme are new ideas in pension planning, being introduced from October 2012 as part of an overall pensions reform strategy. While employer pensions have been around for decades, either final salary and more recently the more common money purchase scheme, it has never been compulsory for companies, and employees, to pay in. Depending on the size of the company, this will change between 2012 and 2016. Each copmpany will have a pension autoenrolment staging date and will need to prepare to make compulsory pension contributions for all staff from this date.

We have a separate dedicated website at www.autoenrolment.info where UK employers can download a free NEST pensions and pension auto-enrolment strategy pack.

Some argue that the new NEST pension is effectively what the Stakeholder pension was designed to be. Stakeholder pensions were brought in to make it compulsory for a company of 5 employees or more, to offer access to a pension scheme. Significantly, however, there was no compulsion to contribute.

Pension auto-enrolment go one step further. Not only will all employers have to offer any employee access, but they will have to pay into the pension for them. Also, there will be an assumption of membership – the individual employee must opt-out.

The contribution levels are based on ‘band earnings’. These band earnings are any income, not just basic salary, between around £5,715 and £38,185 (Nov 2012) and therefore include and commission, bonus or overtime. 8% of earnings between these levels must be paid. This 8% is made up from 3% from the employers, 4% from the employees and 1% from tax relief.

The auto-enrolment aspect is causing much concern for many businesses. Currently, any employee over the age of 22, and under the age of 65 must be automatically enrolled in the scheme within three months of joining. This will depend on each individual employers wishes and how they set it up. 

The employee will be able to opt-out of the scheme, but crucially not until the first payment has been processed. In this situation any contributions made would have to be returned.

There is likely to be a limited investment choice available, probably as simple as cautious, balanced and speculative funds, and there will be a simple charging structure, probably split into an initial charge of 1.8% of contributions and then an annual management charge of 0.3% of the total fund value. The equivilant annual management charge of these two charges is around 0.55%. There will be no advice provided with these schemes.