Workplace pensions law is changing – NEST The National Employment Savings Trust Part 2

Following on from the first article on the National Employment Savings Trust (NEST) Part 1 we look at some of the issues that employers and employees may face under the new regime.

Some controversy surrounds plans to levy a two percent charge on contributions in the first year for each employee, to pay for the start-up costs of the pension. This is in addition to the 0.3 percent annual management fee. The two per cent charge, described as ‘temporary’ may operate for up to 20 years, although this has still to be confirmed.

There are concerns about the potential impact of low level pension savings on means-tested benefits at retirement including the benefits that NEST will provide. However, anyone deciding not to save for retirement to preserve means-tested benefits may be taking a big risk. There’s no guarantee how long today’s benefits will remain in place.

A senior Conservative Party member has apparently delivered a stark warning to the Government that unless it ends means tested state pensions, auto-enrolment could become the “biggest misspelling scandal in history”. “Currently the state pension can be topped up if you don’t have any pension savings. We need to make sure we have the simplification of the basic state pension, in order to ensure that future generations know that every additional pound they save goes into their pension through auto-enrolment or any other vehicle that is going to give them an incremental income in retirement”.

There are plans to introduce a new system where automatic enrolment pension pots would move with employees automatically when they change jobs to minimise the number of small, dormant accounts. This “pot follows member” scheme could cost savers a quarter of their pension, according to an influential group. This group says the plans are “impractical”, “unacceptably risky” and could be “highly expensive”.

They argue that the scheme could reduce the value of savers’ pensions by up to 25 per cent over the course of their career because money could be transferred from good schemes with low fees and high returns to poorly managed schemes with high charges and low returns. Although agreeing with the Government that a system to automatically transfer these small pots is necessary, it is vital that savers are able to get maximum value from even small amounts of savings.

The group is calling for a low-cost aggregator scheme to pool people’s retirement pots from previous employers in one place. When workers move jobs, they would start saving into their new company’s scheme, while their old pot would be transferred to the aggregator. In any event the Government’s pot follows member plans may be under threat because the industry is refusing to pay up to £40m to build the infrastructure necessary to accommodate these reforms. Instead there is rumour that the pension industry wants the Government to stump up between £20m and £40m to build a “central information hub” to facilitate auto-transfers.

It’s a question of ‘watch this space’. The above is food for thought only and must not be construed as giving advice.