If you read nothing else, read this . . .
- The national employment savings trust (Nest) is a low-cost pension scheme designed for low-to-moderate earners and their employers.
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The national employment savings trust (Nest) will be a fairly basic, low-cost, low-risk alternative pension scheme aimed at low-to-moderate earners, says Debbie Lovewell
Just as its abbreviated name suggests, the national employment savings trust (Nest) is designed to enable all employees to build up a nest egg for retirement. Nest is a low-cost pension scheme designed to meet the needs of low-to-moderate earners and their employers, although any organisation can make it available to their workforce if they wish. It is run by trustee body, Nest Corporation, a non-departmental public body that is accountable to parliament through the Department for Work and Pensions.
This month, Nest Corporation announced it has appointed State Street Corporation to provide end-to-end fund administration and custody services until October 2020, with the option to extend for up to five years more. Nest Corporation also confirmed its contract with Tata Consultancy Services to administer the scheme until June 2020, again with the option to extend this for a further five years.
John Lawson, head of pension policy at Standard Life, says: "It is a scheme the government needed to make available because the private [pension] sector is not going to serve every employer in this country. The very smallest employers with low-paid workers and a high staff turnover are not attractive to private pension providers. The cost of setting up all the individual accounts outweighs the amount of charges they are going to bring back in."
Nest will be structured like a trust-based defined contribution pension scheme, with trustee and investment boards, but will have the appearance of a series of individual pension pots held by members. Richard Wilson, senior policy adviser at the National Association of Pension Funds (NAPF), says: "People who change jobs a lot will be able to keep coming back to Nest rather than build up lots of little pots with different employers. Employees will only ever have one Nest account linked to their national insurance number and they will keep that for life."
Contributions capped initially
Contributions into Nest will initially be capped at £3,600 (in 2005 earning terms) a year. This will be increased according to earnings year on year, and reviewed in 2017. Also scheduled for review in 2017 is the ban on transferring funds in and out of Nest.
To keep the cost of Nest low, the scheme will be relatively basic, offering a choice of only five investment funds, ranging from global equities to UK government bonds. "It will be a very simplified product," says Lawson. "It will have no fancy options like income drawdown. The basic fund will be very low-risk. Nest has already carried out a survey of its potential customer base and has worked out these people are not tolerant of high risk. The basic option will probably be a high proportion of fixed interest and also cash deposit. It will be very low risk.
"We think a high proportion of people will end up in that default fund because the sort of worker that will end up being enrolled in [Nest] will not be interested in pensions."
Nest will have a 0.3% annual management charge (AMC) on the value of the fund, but to meet the cost of setting up the scheme, initial charges will also include a 2% charge on contributions. Steve Herbert, head of benefits strategy at Jelf Employee Benefits, says: "One of the strange things about Nest is the charging structure is being flagged as very attractive, but it isn't. Its 0.3% AMC over the lifetime is the biggest charge, so that is very good and competitive. But there is an unspecified 2% charge until such time as the various debts of setting Nest up have been paid back, and they have not really said how long that will be."
Nest is due to launch in spring 2011 on a limited basis for volunteer employers and jobholders. It will then be launched to the first tranche of employers to comply with the first staging dates for auto-enrolment.
