Company pensions explained Auto-enrolment and NEST
From 2012 all employees will be offered a company pension
Currently, not all employers offer a pension scheme for their workforce - and not all those who work for one that does bother to join it. Only 50% of UK employees were members of an employer-sponsored pension scheme in 2009.
Pension scheme membership varies significantly in different industries. It is high in the public sector, energy, financial services and manufacturing sectors (over 50%), but lower in construction, retail, administration, accommodation and food (6%).
Workers who don’t belong to a pension scheme face a large ‘pension gap’ when they come to retire, with state pension and benefits falling short of the amount they need to meet their retirement goals. To overcome this, successive governments have promoted ‘auto-enrolment’, where all employees will be signed up for a workplace pension scheme.
New rules from 2012
From 2012 onwards, employers will be obliged to offer a qualifying pension scheme. If this is defined contribution (DC), total contributions must be at least 8% of an employee’s earnings - of which the employer’s contribution must be at least 3%.
All workers who earn above a certain amount (£7,475 a year) will be automatically enrolled into a pension scheme from October 2012 if they work for a large employer and by 2016 if they work for a smaller firm. They can ‘opt out’ and leave the scheme, but only after they have been automatically made a member.
Many existing occupational schemes and company sponsored group personal pensions already qualify, but will be extended to take in a greater proportion of the workforce. Employers without a scheme can set up one of their own or enrol their workforce into the National Employment Savings Trust (NEST).
National Employment Savings Trust (NEST)
NEST is an independently-run defined contribution (DC) pension scheme, specifically designed for low-to-moderate earners and those whose employer has no existing scheme. It will also be open to the self employed who wish to set up a personal pension.
- NEST members will be restricted to an annual contribution limit of £3,600. This is the combined total from the member, their employer and the government (via tax relief). The minimum employer contribution is 3% of qualifying earnings.
- NEST charges for members have been set at a 0.3% annual management charge and an initial 1.8% charge on contributions. For most people, these will be lower than existing DC schemes, which typically charge an annual management charge of 1%.
- NEST investment choices will be limited to a five default funds and an ethical fund. Final details have yet to be released but they will incorporate lifestyling, to reduce risk as a member nears retirement.
Ultimately, auto-enrolment will greatly increase the number of people in DC occupational pension.
On the publication of legislation to bring in the new system, the minister for pensions Steve Webb said: ‘This Bill will radically transform the pensions landscape in this country. Millions of people, who currently have little or nothing put by for their retirement will, from 2012, find themselves enrolled in a workplace pension – setting them on the road to a more secure future.’
For more advice on pensions, see our book Pensions Explained, which covers state, personal and company pension funds.
