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Don’t Put all your (Nest) Eggs in one Basket
By Christopher J Sherliker

Dear Readers, I thought our little homily this quarter would be on the topic of auto enrolment, with some brief thoughts on the possible vehicles that employers can use to ensure that they comply with the new rules on workplace pension provision being introduced from 2012.

If anyone out there is now saying, “What new rules on workplace pension provision?”, go and stand in the corner and write out 200 times, “I will pay more attention to my pension lawyer in future.”

The pension landscape will undergo significant change from next year. Over the next four years, every employer, no matter how big or small, must auto enrol their employees (or eligible jobholders as the legislation pithily describes them) into a qualifying workplace pension arrangement.

In a nutshell, an eligible jobholder is one who is not already in a workplace pension scheme and

  • is at least 22 years old
  • has not yet reached State Pension age
  • earns more than the minimum earnings threshold (likely to be £7,475 a year)
  • works or ordinarily works in the UK

Many larger employers will already have an existing pension scheme which they may be able to use for the purpose. Historically these may have been a Defined Benefit (Final Salary) scheme, but these are a rare beast outside the public sector nowadays, and it is far more likely that they will have adopted a Defined Contribution or Money Purchase model.1

There is, however, a significant tranche of the great unpensioned out there (including, dare I say it, many, many solicitors and their firms) who will, for the first time, be required to actually contribute to a pension scheme for their staff.2 Like any pension legislation introduced by governments of whatever hue, the introduction of auto enrolment (as it is called) has gone through several consultations and drafts spread over several pieces of legislation. Unsurprisingly it is being phased in over time and in 42 stages. (Count ‘em, yes 42 – depending on the size of employer and their PAYE coding; ‘keep it simple’ is a phrase not in the Civil Service Handbook apparently).

I don’t intend this article to be a technical analysis of the finer points of the legislation – there is plenty of stuff already out there in print and on the web, including a handy 17-page mini guide to the process prepared by the DWP and available at DWP website – but I can’t resist sharing with you just a taste of the complexity that has been built into the system. I can do no better than to actually quote from the guide I have just referred to. It concerns jobholders being able to opt out of the process and it goes like this:

Workers can opt out if they want to. They have a month to opt out from the day they officially become a member of the scheme. Any payments into the pension pot made during this time will be refunded.

  • After this opt out period workers can choose to leave the scheme at any time. However, the payments already made will not be refunded and will remain in their pension pot.
  • Workers who have opted out or left the pension scheme can re-join at a later date if they wish.
  • Employers will also have a duty to automatically enrol workers back into the scheme approximately every three years, (my emphasis) so long as they are at least 22 years of age, below State Pension age and are earning over the minimum earnings threshold. This is to give those who have left the scheme the opportunity to reconsider their pension saving.

Dear readers, just think about that for a moment. And remember that the employer can do nothing that might be seen as any sort of encouragement or assistance to the jobholder in making their decision to opt out or stay opted out.

So even if the jobholder has been very clear on their wish not to be a member first time round, that wish will be ignored every three years, just on the off chance that they’ve changed their mind. Now they may well have changed their minds, of course, but do we REALLY need legislation to force them back into something they may not want? Is not a simple request to join the scheme at any time quite sufficient and, indeed, provided for in the legislation?

Well, I leave you to decide that question. The policy intent is clearly to try to get more people to save for their retirement and, to that extent, of course it is a good thing. However, for many smaller employers, the additional burden of administering the system will not go down well. Analysis of the likelihood of significant opt outs is being somewhat played down at the moment, but anecdotal evidence suggests that rather more will do so than the government expects.

So, back to the main thrust of this article. Suffice to say that if an employer does not wish, or cannot afford, to set up a bespoke arrangement, the government has very kindly set up a default option called NEST or the National Employment Savings Trust, which will be available for any employer to utilise in order to meet its statutory obligations. It will (and indeed must) accept all employers who wish to use it; but some of its restrictions can, in some ways, appear somewhat anti-competitive. For example, there is a cap on member contributions (£4,200 at 2010/11 rates) and it cannot transfer pension rights from or to other schemes. Tim Jones, the CEO of NEST admits that if it were down to him, those limits wouldn’t apply, and it’s understood that the government will have a further look at those limits sometime in 2017.

One of its big ‘selling points’ is that it will offer a standard low charge to members, broadly equivalent to a 0.3 percent Annual Management Charge (AMC), comparable with those currently available to members of large workplace schemes – although there is also an additional 1.8 percent levy on each contribution, which is intended to cover the start-up costs of NEST.3

Ah yes, contributions. This again is going to be on a phased basis, with a minimum of one percent each from the employer and the employee from November 2012 to September 2016, two percent from the employer and three percent from the employee between October 2016 to September 2017 and three to five percent from October 2017.4 Let’s be honest, no one is going to be able to afford a luxury lifestyle on that level of contribution, but it IS a minimum. The fear in the industry, however, is that this will, in effect, be a ‘ceiling’ rather than a floor, especially in times of economic austerity. If so, that will be a great pity, albeit perhaps understandable.

It is unclear whether NEST expected that they would have everything ‘their own way’ in this marketplace – I am sure they would say that they always expected competition and, sure enough, that competition is beginning to emerge. It comes from overseas in the form of a Danish alternative. It is provided by ATP – the company which provides every Danish employee with their pension. Their wide experience and efficient systems (they say) allow them to provide an effective low-cost solution to our auto enrolment problems. Cost? Well, they say 0.3 percent AMC and a simple £1.50 per month admin fee – on the surface, pretty good and clearly competitive with NEST, plus it seems to include a seamless administration function that NEST can probably only dream about.

Only time will tell if they actually make a dent in the marketplace, and if other players will want a slice of the pie. The secret, it seems to me, is to provide a simple, seamless, hassle-free solution to the small employer with minimal cost and disruption. Payroll and HR systems that actually ‘talk’ to each other would be a good start. But whether a commercial outfit can provide all that at the right price – well, watch this space. Oh…and check your staging date…you’ve only got 42 to wade through!

Added: 29th November 2011

Christopher J Sherliker is a partner for Silverman Sherliker LLP who provide legal solutions across a spectrum of requirements.  Find out more about Silverman Sherliker LLP.

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