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Clearing up a few things about pensions

henry tapper

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.

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