Update on NEST

UK individuals who do not belong to a pension scheme could face an uncomfortable and penurious retirement. At present, not every employer provides a workplace pension scheme for workers and, even if such a scheme were available, employees are not obliged to join it. According to consumer group Which?, only 50% of UK employees were enrolled in an employer-sponsored pension scheme during 2009, and membership of pension schemes varies widely from one industry to the next. Membership of pension schemes is relatively high in sectors such as energy, financial services, manufacturing and the public sector, but is lower in areas such as construction, retail and administration.

However, from 2012, firms have to provide a qualifying pension scheme. Every employee earning more than £7,475 per year will be automatically enrolled in a scheme from October 2012 if they work for a large company and by 2016 if they work for a smaller company. Companies can set up a qualifying pension scheme of their own, or they can enrol their employees in the National Employment Savings Trust (NEST).

NEST is a major component in the government’s reform of occupational pensions. Aimed at employees with low-to-moderate salaries, it is intended to provide a simple, inexpensive, accessible pension scheme that will increase individuals’ savings for their retirement. NEST members will use their accumulated pension pot to buy an annuity that will provide their retirement income. NEST has selected a panel of five providers – Canada Life, Just Retirement, Legal & General, Partnership and Reliance Mutual – but members are also able to look elsewhere, although they will need to seek professional advice. A Which? pensions expert commented, “The NEST panel... offers less choice than a whole-of-market search but should deliver good outcomes to most members.”

Looking ahead, a House of Commons Work & Pensions Committee has been set up to examine how automatic enrolment into NEST will work, and how it will affect smaller firms. It will also review the current ban on transfers in and out of NEST, and examine the possible effect on NEST of lower-than-expected membership. Approximately four million individuals are expected to join NEST, although they will be able to opt out after enrolment. Meanwhile, pensions consultant Hymans Robertson has warned that many employers are not preparing adequately for the cost or the implementation of the process.