Government has plans in place so we can all have a Nest egg
Published 06/12/2011 | 08:00
Very few private sector employers offer a significant pension saving scheme to all of their employees.
The majority of private sector employees have no formal contractual commitment to regular saving for funds to rely on when they retire. Of the 550,000 private sector employees in Northern Ireland, the estimate is that probably over 400,000 are not members of an employer initiated pension plan.
In contrast to the public sector, where final salary pension schemes are widely available, in the private sector, final salary related pension schemes are only available to a small minority of employees. There may be less than 20 large private businesses with an all-employees final salary pension scheme.
In the private sector, all of this is about to change through new legislation now on the statute books. For employers the law on providing for employees to save for retirement will intervene. Starting with the largest employers, from 2012, it will be compulsory to operate a retirement pension savings scheme and it will be compulsory to enrol all employees.
In late November the Government agreed to slow down the phasing in of firms with a smaller number of employees.
Unless the employer has an approved alternative, employees will be auto-enrolled in the new National Employment Savings Trust (Nest). Auto-enrolment is the device to make the scheme inclusive. Private sector employers will be compelled to offer a comprehensive savings scheme for all employees.
Employers can choose a scheme from a range of alternative proposals but with the condition that the arrangements must be as favourable to employees as those in Nest. Nest is the default option but because of the official arrangements is also likely to be extensively used.
The Nest scheme was expected to apply to all employers, even very small employers, by 2016. Ultimately, the minimum contribution to an employees' saving will be 8% of earnings. This 8% will come from 3% paid by the employer, 4% from the employee and about 1% in a tax concession on the savings.
The Nest scheme will impose organisational demands which have been estimated to be at least £40 for each new employee enrolled. Employers are unhappy with the passing on of extra costs to them. The only concession is a revised phasing in timetable.
Adrian Sims, senior relationship manager at Nest, has been explaining the new general requirements to pension and savings specialists in audiences where other options were on the table.
Maxwell Buchannan, senior manager at Kerr Henderson, believes that, while Nest is on offer, the one size fits all approach will not apply. He suggests the Nest scheme is constrained by maximum contribution rates, employers who seek the flexibility of higher contributions may seek an alternative scheme.
The requirement to meet the new legal minimum provision may, in a perverse reaction, give a further push to the reduction or withdrawal of some existing selective schemes. Kerr Henderson points to the possible attraction of additional salary sacrifice schemes.
The advice to employers is that preparations for the changes should not be delayed. Existing schemes and employment contracts need to be reviewed. Pension policy changes loom large for both the public and private sectors.