Over a million employers will be affected by the new pension reforms and will be required to establish a qualifying workplace pension scheme for employees. Between October 2012, when these reforms start to bite, and September 2016, when the planned phasing stages are complete, we will see the advent of a million new private-sector workplace pension schemes – an unprecedented occurrence.
The million employers have something like 10 to 12 million eligible employees. It seems likely that hundreds of thousands of those employers and maybe as many as six million of those employees will benefit from using the national employment savings trust default scheme.
The reforms will also affect employers who are already running pension schemes. All existing schemes will need to be audited to see they measure up to the new standard . In addition, employers will need to ensure all their eligible employees are enrolled into a qualifying scheme.
In practice, it is likely that many larger employers will either introduce a minimum level qualifying scheme in addition to their existing pension schemes or use the Nest default scheme to provide pension coverage for all their employees.
The scheme employers choose may well be chosen on cost. The main feature of the Nest scheme is its low-cost approach. The original idea was the Nest scheme would operate on an annual charge of just 0.3 per cent – a very low level compared with many existing schemes and even lower than stakeholder.
However, even though the charging structure recently announced for Nest scheme is the 0.3 per cent anticipated, this is in addition to a 2 per cent charge on all contributions made by employees, employers and the taxman. This is to cover the cost of establishing the scheme and paying back the Government loans made in the early years. It is not clear for how many years the 2 per cent charge will apply but it could be for as long as 10 or 20 years. In part, that will depend on how many people join, how much they contribute towards their pensions and how persistent they are in their membership. The real cost of the scheme for the employees who join it in its early years will never be known for certain in advance.
The expectation is that over the long term the cost for future employees joining the scheme could well be as low as an annual charge of 0.3 per cent but that will effectively have been paid for by the early members.
This lack of clarity will cause problems for advisers and employers when considering what pension scheme or mix of schemes will suit any firm from 2012 onwards – it does nothing to make pensions simpler and easier to understand.
Steve Bee is managing pensions partner at Paradigm