NEST to be introduced from 2012

October 2010's Comprehensive Spending Review has confirmed the introduction of NEST (National Employment Savings Trust) from 2012 onwards.

With the Government ‘keen’ to encourage millions of low- and moderately paid employees to start saving for their retirement, from 2012 onwards, all companies, unless a pension scheme is already in place, will need to automatically enrol employees into their workplace pension schemes, unless they (the employee!) actively opt-out.

Auto-enrolment into NEST

The introduction of NEST will force all employers to automatically enrol employees in a pension fund unless they (repeatedly!) opt-out:

• employees will contribute 4 per cent of your pay to your workplace pensions,
• employers will be paying in 3 per cent, and
• the Government (i.e. the tax payer) is topping this up with 1 per cent

It has been estimated that as many as 11 million low and moderate earners will be auto-enrolled, with the new pension scheme expecting to be the default option for four to eight million workers by 2050.

I repeat, unless you specifically and repeatedly opt-out you will automatically pay 4 per cent of your salary into the new pension scheme.

To ‘kick-start’ the new pension scheme, the Government has provided it with a ‘start-up’ loan.

In order to repay the loan and interest, NEST is charging a 2% fee for at least 10 years to all contributions received, including those from the employee, employer and the taxman.

Once the loan is repaid, it will drop this fee. In addition, however, from the moment you enroll, it will charge an annual management fee amounting to a relatively modest 0.3 per cent.

Overall, that’s more than a third higher than Stakeholder Pensions and substantially more expensive than several investment trust based pensions.

Sorry, say that again?!?

Suppose, you are contributing £100 per month – unfortunately of that only £98 will go into your pension scheme, and you would then be subject to a further 0.3 per cent management charge each year.

The dual-charging structure is to cover the start-up costs. Once these costs have been repaid the 2 per cent fee would stop.

Some commentators have already predicted that if take-up is slow, it could take up to 20 years before the fee is been removed.

Is This A Good Deal Or A Bad Deal?

Well, it all depends on how old you are, how much you earn, if you have savings or not, and, if there is an alternative . . . .

1. thousands of employees on low pay, who are ‘forced to pay’ into the scheme, are likely to lose means-tested benefits to which they would otherwise be entitled later-on because they will then have savings in the new pension scheme.

   The whole exercise appears to aim to push low earners into automatic saving mode and, therefore, potentially deny them means-tested benefits in retirement, in particular pension credit.

2. early joiners to the scheme who are close to retirement age are likely to be worse off in comparison to later and younger contributors.

   The introduction of the new scheme appears to be an expensive way to start saving for older employees. The way the charges are structured hugely disadvantage them. They are unlikely to ever see the 2 per cent contributions fee removed.

   Those employees whose money is invested for five years or less will find the upfront contribution charge less cost-effective than annual management fees from several investment trust based pension providers.

   I would guess, once better informed, many employees are likely to be deterred by the upfront charges that may actually shrink their already relatively small savings in the early years of the scheme.

   Nevertheless, in ten or twenty years time, the new pension scheme may be a cheaper option for many then younger employees. Over the long term the 2 per cent upfront contribution charge becomes proportionally less significant.

3. The decision by the Trust to invest in relatively low-risk, low-return assets such as company bonds and Government bonds (Gilts), may, when combined with the 2 per cent fee and 0.3 per cent annual management charge, lead to low returns for members in the earlier years, if any.

   Putting, in particular, younger members’ contributions in low-risk, low-return investments at the start contradicts conventional investment wisdom that long-term savings should be put largely into equities.

Perhaps actively and repeatedly opting out and doing it yourself by becoming an early retirement investor may be a better recipe to Retire Earlier and Richer than staying put.

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