Is there a cuckoo in your NEST? Compulsory workplace pension for all still has issues.
Are you looking forward to feathering your NEST? Clearly I am not talking about a stick based avian abode, but rather the Government’s newest idea to encourage* people to save for their retirement. Presumably because they know more about the future of the State Pension than we do...
The Government estimates that about seven million people are currently under-saving (if at all) for retirement. Believing that all these people need is an easier way to save for retirement, in 2010 they announced the National Employment Savings Trust scheme, a compulsory offering from all employers employing 5 or more people.
The NEST scheme
Currently, employers are already required to offer some form of pension provision to their employees where they have 5 or more qualifying employees, but under the new scheme, from October 2012 UK employers will be required to automatically enrol employees into a 'qualifying pension scheme'. This new scheme must be contributory, where currently there is no compulsion on employers to do anything other than make a stakeholder scheme available.
The total contributions into a NEST will total 8% of salary a year, comprised of a 3% employer contribution, a 4% employee contribution and a 1% Government contribution (through tax relief at source of employee contributions). The charges on the fund will be capped with an annual maximum management charge of 0.3%, along with contribution fees of 1.8%. NEST corporation have also asked us to point out that you can contribute up to £4,200 (including tax relief) into a NEST, or other pension provision, if you like, which is approximately 16% of an average full-time wage of £25,000.
This all sounds good for me. What’s the problem?
Well, in the 12 months since the latest details were announced, a few people have made, um, observations on the likely effectiveness of this Bright Idea.
In May, the Association of Consulting Actuaries (ACA) warned that the NEST contribution of 8% is just not enough to keep people in their old age, and they should know- actuaries are the boffins that work out annuity rates based on how long you are going to live.
The ACA recommended that contributions should equate to one half a worker's age, meaning a 40-year-old employee should pay in 20%. Given that few employees or employers could afford this much, and that the ACA suggests that, for millions of low-paid workers, a paid-for NEST will simply be a substitute for state benefits, the whole scheme is looking to be good for the Government’s purse, but not yours.
The ACA also warned that the launch of NEST could accelerate a 'race to the bottom', with workers losing out as employers shut down generous existing schemes, to be replaced by basic NEST pensions.
Now, Consumer Focus has waded into the debate, with a number of recommendations on personal pensions, including NESTs. In particular, they are concerned that the new scheme will generate a have and have-not divide, with those who were sensible enough to make pension provision before it became compulsory from losing out.
Given the lower charges, a fund within a NEST scheme would grow faster than one outside the protective wrapper, particularly given the ‘opaque’ nature of private scheme charges and the industry practice of trail commission, where your IFA keeps getting paid from charges levied on your fund, years after he or she provided the advice.
Currently NEST schemes will not accept transfers, but Consumer Focus has identified 2 million ‘modest savers’ who would benefit from a limited value transfer scheme, and who would therefore be on a more level footing than their tardy comrades.
Of course, the NEST scheme is not due to start its phased implementation until October 2012, so there is still time for more issues to come out- and for the Government to fiddle with the rules.
*The onus is on employers to help 'encourage' more people to save, where 'encourage' means 'automatic enrolment'…