Clearing up a few things about pensions

Muddled thinking

There’s a lot of muddled thinking among large employers about auto-enrolment. Nowhere more than the confusion between NEST the product and Auto-Enrolment, the means of increasing take-up of workplace savings schemes.

The confusion seems to be caused by definitions and particularly a rogue definition “the NEST contribution structure”. To make it clear, and this link takes you to a good explanation , NEST is a pension scheme and does not have a contribution structure. What’s wrongly being referred to as the NEST contribution structure is the standard definition of qualifying earnings for auto-enrolment.

Most employers who run pension schemes for their staff do not use this definition but use something simpler like “basic pay” and it looks like most will continue to provide pensions on their definitions provided that the definition  can be certified to be as good as the “standard definition”.

The muddled thinking leads to all kinds of secondary confusions. Some employers think that to use their existing pension scheme to auto-enrol, they need to adopt the standard contribution structure, some believe that they will need to use NEST going forward if they are to adopt the standard contribution structure. 

Known unknowns

If there are misunderstandings, there are also known unknowns. Nobody knows whether using a bespoke “certified” contribution structure, the employer can stage the introduction of the full auto-enrolment contribution as they definitely can by using the standard charging structure.

NEST alongside existing schemes.

Current thinking is that most employers will either run a NEST pension or an alternative qualifying pension but not both. Current thinking assumes that employers who can’t be bothered will opt for NEST while those who fancy offering a decent pension will continue to use their current plans or get themselves an upgrade.

But the insurers may have other ideas about that. The word on the street is that insurers are far from happy at the though of their clinically underwritten DC plans, polluted by the coerced inclusion of the great pensions unwashed, a population with low incomes, high job turnover and little interest in improving insurer‘s financials by making voluntary contributions.

Look forward to a lot of horsetrading with DC providers on ongoing terms as they either seek to knock up the AMCs to cope with the AE rabble or refuse to bring down charges claiming margin erosion round the corner.

Clearing contributions

Which brings me – eventually to the title of this blog. It may become quite common for workforces to be split between those who have an alternatively qualified DC plan (with a proper contribution structure established on a “certified” basis) and the rest who will get NEST on a barebones contribution scale.

If such split workforce contributions become common, the big risk will be operational and will involve insuring that payrolls point contributions to the right scheme. In a complicated world of opt-ins, opt-outs and re-enrollment, the chances of contributions going to the wrong place or nowhere at all seems odds on.

I’ve not felt we’ve had a lot to learn from Australian superannuation arrangements (till now) but I’m coming round to the thinking that we really should b e engaging with the software providers who have solved these issues in the wonderland of Oz.

We may need Superchoice to do our clearing up.

About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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9 Responses to Clearing up a few things about pensions

  1. Peter Philip says:

    Henry, first off, thanks for the plug!

    I think there are a lot of parallels between Auto Enrollment and the introduction of Choice of Fund in Australia. Not because I think that the UK is going down the Choice path (that will come later, I am convinced) but because Choice created a huge burden on employers and resulted in absolute chaos for many years. In Australia it was the pension providers that the employers turned to to sort out the mess. Those that helped the employers sort out the mess did well and continue to do well.

    Re: NEST – I think this is the thin edge of the Choice wedge – but this is probably a topic to discuss later…

    Cheers,
    Peter

    • henry tapper says:

      Peter

      I agree that most employers will not give employees access to whatever pension provider they chose. I worked with a Japanese bank that tried that in the 90s and ended up with direct debits to over 50 personal pension providers.

      At present there is no way of clearing contributions from payrolls.

      Interestingly, I spoke to a large Provider in the UK who claimed they were considering writing software for their large corporate clients so that they became both provider and clearer (of contributions being sent to NEST).

      This suggests that for the Providers , NEST is increasingly being seen as the “DC dustbin”.

      Glad you found the blog!

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