The question isn't at what age I want to retire, it's at what income. ~ George Foreman.
As we promised a few weeks ago, today we're posting on National Employment Savings Trust (NEST). The main reason for this is that the conversations we've been having in the market seem to indicate that this topic has largely slipped under the radar and we think employers should at least be aware of the impending changes.
What is it?
Work based pension reforms are coming in from 2012 (phased to 2016) which means that employers must provide a pension scheme for "eligible jobholders". Eligible jobholders are defined as workers who:
- earn more than the minimum earnings threshold
- are aged between 22 and state pension age; and
- work in the UK.
It should be noted also that the term "workers" is broader than the term employees and can include temps and contractors.
For many employers it will not be feasible to set up a specific workplace pension and so in response to this the Government has mandated NEST as an alternative which is basically like a private pension scheme but will be run by the NEST corporation, a non-departmental public body that operates at arm's length from government and is accountable to Parliament through the Department for Work and Pensions.
Why are Pension Reforms being introduced?
The UK is facing something of a pension time bomb. People are living longer, the demographic of the population is shifting so that fewer taxpayers are supporting more pensioners and approximately 7 million people are not saving enough to live out their retirement in comfort. While we already pay NICs to gain entitlement to the State Pension, the fact of the matter is that the State Pension is not sufficient and additional savings are required.
What does it mean for employers?
From October 2012 there will be new legal duties on employers: as an employer, you will have to enrol your workers into a workplace pension scheme that meets or exceeds certain legal standards (termed a qualifying scheme). These standards set out a number of things, including the minimum amount of money you as an employer have to contribute towards your workers’ pensions. As mentioned above, if you do not offer a qualifying scheme then one needs to be set up or alternatively, you can use the NEST scheme (it's basically a pension scheme of last resort).
The main employer consequence is this: if everyone has to be enrolled in a pension scheme (be it NEST or otherwise) you as the employer will have to make contributions to that scheme. As a result the cost of employing low wage workers and workers not already enrolled in a qualifying pension scheme will increase.
How much will I have to contribute as an employer?
Currently the figures look like this (they are being phased gradually between 2012 and 2017):
- Total Contribution must equal 8% of employee earnings; and,
- Employer's minimum contribution is 3%.
So employers are going to have to find an additional 3% of employee's earnings for those employees not currently in a scheme. Furthermore, those employees themselves are going to see a 4% drop in their take home pay. Employers should be prepared to deal with employee queries on this point. It should be noted that there are opt-out mechanisms in place but there are special rules barring employers from encouraging employees to opt-out or from discriminating in favour of employees who will opt-out.
More detail on NEST can be found here.
When is NEST going live?
NEST has been on the books since 2005 and is due to come in from October 2012, however it will be available on a voluntary basis from the Spring 2011. If you wish to read more about joining before 2012 click here.
What are there the tax implications?
NEST will be treated in line with the rules for personal pension schemes: Tax relief at the basic rate will be obtained automatically with the Government contributing £1 to the scheme for every £4 given by an employee. Higher rate taxpayers will need to make a claim on their Tax Return.
Contributions made by employers are deductible against corporation tax.