Pension warning to firms

This will have significant cost implications for employers, particularly those with no company pension scheme at present, who must now set up a pensions department to make a pensions provision for staff, according to financial services firm, Principle First.

Employers have two options, either offering pensions through NEST or by setting up an in-house occupational pension scheme.

Employers who opt for the NEST scheme will pay 3% of salaries into NEST pensions, while workers provide 4% and government 1%, giving total contributions of 8%.

A spokesman for Londonderry-based Principle First said: "Ignoring the issue of company pensions is no longer an option for employers. PADA, the government authority organising NEST, has said that 9 out of 10 employers will have major changes to make in the near future, as NEST will mean a pensions department in every company.

"All employees with no other pensions option will be 'auto-enrolled' into NEST. Only employees who actively opt back out of NEST, after auto-enrolment, will not participate.

"It is estimated that, in the average company, over 80% of employees will have a company pension, once NEST is fully operational. With the average pensions uptake in companies with a current scheme running at just 55%, the huge increase in administration costs is clear. New company overheads will include employer contributions, plus substantial administration costs for managing pension contributions and pension benefits."

Control

Alternatives to NEST give more control. However, Principle First says that employers who act now can set up an in-house company pension scheme which would exempt them from the requirements of NEST, and give them significantly more control over meeting the legal requirement to provide their workers with a company pension.

"Employers who act now can take control their costs, by creating their own occupational pension scheme, that will exempt them from the NEST.

"This also offers an opportunity for an additional employee incentive, as a quality occupational pension is likely to deliver a higher retirement income than NEST."

There are a number of controversies surrounding the concept of NEST, says Principle First.

"First, the current basic state pension of 95.25 per week can be supplemented by a top-up to 130 in the form of pension credits. This is a means-tested benefit, which is available only to those with no additional income or savings of their own. Many would now stand to lose these pension credits due to their NEST pension, with the result that they would be little better off for having saved in the NEST. Cynics might take the view that the government has pulled a nifty stroke by saving on pension credits, by having the individual fund their state pension top-up, in the shape of income from NEST, themselves.

"Employees of 50 or older, with less than 20 years left before their retirement, may have a very inadequate pension return from NEST, as their contributions will not be invested for long enough – but may still stand to see their pension credits affected. Second, NEST is being launched on the back of a 600m loan from government. This will be repaid by a 2% levy on member contributions, until this loan is repaid. (Incidentally, NEST has already forked out 360,000 to come up with its logo: the word NEST inside an egg.)

"As a government initiative, the running of NEST will be subject to public scrutiny, particularly with regard to its overheads and the management fees charged by the investment funds where contributions are invested. For that reason, some experts predict that NEST may be run with a view to keeping costs low, and as such may be unable to invest in the better funds on the market. It may therefore disappoint retiring workers, with its eventual performance and returns."