By now employers should hopefully be aware of the new National Employment Savings Trust (“NEST”), which is being introduced to extend pension scheme coverage in the UK. NEST will provide benefits on a defined contributions (sometimes known as money purchase) basis and is established under trust with a company known as NEST Corporation as trustee. The scheme is intended to be a low-cost pension saving vehicle and is aimed at those employees of private sector employers who currently do not participate in a pension scheme.

How NEST will operate

Although NEST will be launched in Spring 2011, this will initially be on a voluntary basis only. From October 2012 employers will, however, be required to enrol their employees automatically in NEST unless they provide employees with access to a pension scheme with similar contribution levels. This requirement for automatic enrolment will be phased in between that date and 1 September 2016 depending on the number of employees that an employer has as at 1 April 2012. It should be noted that there will be no exception for employers with less than 5 employees, unlike the position under the legislation for stakeholder pension schemes.

In order to be eligible for automatic enrolment employees must be employed in the UK with at least 3 months’ service, be aged 22 or more and under state pension age and earning above the income tax threshold. Employees will be able to opt out of automatic enrolment in NEST if they wish; employees may also be able to opt in to NEST if they are employed in the UK, but do not otherwise meet the conditions for automatic enrolment. In the latter case an employee opting in will be eligible to receive employer contributions.

The intention is that NEST will operate on the basis of employee contributions of 4% of earnings above the national insurance threshold; a further 1% in the form of tax relief; and an employer contribution of 3%. The employer contribution rate will be phased in, initially commencing at 1% and increasing to 2% in 2013 and to 3% in 2014; the employee contribution rate will be similarly phased in - again commencing at 1% and increasing annually to 4% by 2017. Employers and employees will be able to pay in higher contributions than these minimum amounts if they wish, subject to an overall annual limit on the total amount of contributions that may be paid in respect of an employee.

What should employers do now?

Employers will need to look at any existing pension arrangements they may have to determine whether these fall within the description of a “qualifying scheme”, which would exempt them from automatically enrolling employees in NEST. Even where an existing scheme meets the conditions for exemption, an employer should consider whether it wishes to provide access instead to NEST for certain categories of employees, e.g. seasonal employees or new entrants. In any event NEST may not represent the best option for a particular employer, especially in light of the overall annual limit on contributions. In order to provide a greater degree of flexibility an employer may wish to consider introducing a ”qualifying scheme” for some or all of its employees where no such scheme has been offered before, or indeed amending the rules of an existing scheme to benefit from the exemption.

From a practical point of view employers will need to consider what steps they should take to provide for the automatic enrolment of employees in NEST or an alternative scheme and for employees to opt out or opt in and ensure appropriate systems are put in place. Employers will also need to budget for their anticipated employer contributions.

It is therefore recommended that employers seek the advice of pension consultants on their options as well as legal advice on their obligations under the new legislation.
 

For Further Information

For further information please contact Steven Dunn, Head of Pensions or your usual contact at Anderson Strathern.

This bulletin is for general information only and does not constitute legal, investment or other professional advice. Please contact us should you require advice on any particular legal issue. Anderson Strathern LLP accepts no responsibility for any loss that may arise if reliance is placed on any information or opinions expressed in this bulletin.