Key facts: Auto enrolment and NEST

Key facts: Auto enrolment and NEST

2 About this guide This document highlights the key facts about NEST and addresses many of the myths surrounding auto enrolment. Some of the areas this booklet covers are set out in the legal rules that govern NEST, known as the order and rules. We ve taken care to make sure this booklet is an accurate summary of some of these key points in the legal rules, but it doesn t cover everything. If anything in this booklet is unclear, you can refer to the order and rules for more information. Occasionally, the order and rules will be updated and those updates might not be immediately reflected in this booklet. In those cases, what s written in the order and rules will override the information here. You can read the full order and rules or view an easy-to-understand summary at nestpensions.org.uk/library Find out more about auto enrolment at tpr.gov.uk/actnow

3 Contents Key facts: what you need to know about NEST Pension reform 6 Where NEST comes in 7 The new duties 8 Who ll be automatically enrolled? 10 The role of the government 12 Introducing NEST 13 NEST for employers 14 NEST for savers 16 NEST for advisers 18 Charges 20 Looking after members money 22 NEST Retirement Date Funds 24 Our other fund choices 25 Who can use NEST? 26 Case studies 28 Myth buster: putting the record straight Myths about auto enrolment for employers 32 Myths about NEST 34

4 NEST is open to employers of any size or sector

Key facts Key facts: what you need to know about NEST 5

6 Pension reform Government estimates suggest that around thirteen million people aren t saving enough to give them the retirement income they want or expect. The Pensions Act 2008 established new duties on employers aimed at tackling this challenge. The new duties mean that employers will have to provide their workers with access to a pension scheme that meets or exceeds certain legal standards. They ll need to automatically enrol some of their workers and others will be able to ask to join. They ll also have to contribute to the retirement pots of many of their workers.

7 Where NEST comes in NEST (National Employment Savings Trust) is one of the pension schemes that employers can use to meet their new duties. It s been set up by law as part of the reforms and is specifically designed for auto enrolment. It s a trust-based scheme, run independently from the government on a not-for-profit basis in the interests of its members. It s open to any employer who wants to use it to meet their new duties.

8 The new duties All automatically enrolled workers and many workers who ask to join are entitled to a minimum contribution to their retirement pot. This is made up of money from their employer, money from their pay and tax relief from the government. These reforms are being introduced gradually. They applied to the largest employers first, starting in October 2012. By 2018 they ll cover all employers. The date the new duties apply to a particular employer is known as their staging date. Employers can find out their staging date from The Pensions Regulator (TPR) at tpr.gov.uk

9 Minimum contributions are being phased in gradually In the example below these minimum contributions are based on a band of earnings known as qualifying earnings. For the 2015/16 tax year this is everything over 5,824 and up to 42,385. The limits are reviewed each tax year. 9% Employers are free to use alternative earnings bases if they want, in which case different minimum contribution levels apply. 8% 7% 1 per cent tax relief Percentage of qualifying earnings 6% 5% 4% 3% 0.6 per cent tax relief 2.4 per cent worker 4 per cent worker 2% 1% 0% 0.2 per cent tax relief 0.8 per cent worker 1 per cent employer 2 per cent employer 3 per cent employer Oct 2012 Oct 2017 Oct 2018 onwards

10 Who ll be automatically enrolled? Employers need to automatically enrol all workers who: work or usually work in the UK aren t already a member of a workplace pension scheme are aged at least 22 but under State Pension age earn more than 10,000 - this figure applies to the 2015/16 tax year, and is reviewed each year by the government. These people are known as eligible jobholders. After they re enrolled, their employers will also have to make a minimum contribution into the pension scheme on their behalf. Members of NEST have the right to opt out within one month of being automatically enrolled. If they opt out within this onemonth period they ll get their contributions back. If they miss the deadline they can still stop contributing but anything they ve paid in will stay in the scheme until they re entitled to take it out.

11 Eligible jobholder Earns 32,450 a year Isn t a member of a workplace scheme 32 years old Eligible jobholder Earns 15,370 a year Isn t a member of a workplace scheme 22 years old Eligible jobholder Earns 29,890 a year Isn t a member of a workplace scheme 45 years old

12 The role of the government The Department for Work and Pensions is the government department responsible for pensions. Their key role in the reforms is to coordinate activity for the reform programme, including agreeing policy with ministers and overseeing delivery. For further information about government policies go to dwp.gov.uk/policy/pensions-reform TPR is a non-departmental public body and the UK regulator of workplace pension schemes. It works with pension trustees, employers, pension specialists and business advisers to protect pension scheme members money and encourage high standards in running pension schemes. Part of its role is to make sure employers and pension providers comply with the new duties and to monitor safeguards to protect workers who want to save in a pension scheme. TPR is also responsible for making employers aware of their duties and how to comply with them. For more information about compliance with the employer duties contact TPR at tpr.gov.uk

13 Introducing NEST NEST is a workplace pension scheme that any employer can use to meet their new workplace duties. It s the only auto enrolment scheme in the UK with an obligation to be open to any employer regardless of the size or value of their business. NEST is run in the interests of its members by NEST Corporation, which has been appointed as Trustee of NEST. NEST Corporation doesn t have shareholders and is run on a not-for-profit basis. It s been designed to be easy to manage online for both employers and members, based on in-depth research into their needs. Our research programme has covered investment, communications and usability, with findings in each area directly reflected in the product s features.

14 NEST for employers Built for auto enrolment NEST has been created to make it easy to comply with the new duties. We ve got it all covered with online tools like communication templates, pre-set enrolment types and electronic member opt-outs that make it easier for you to fulfil your duties. You can also hand over some or all of the tasks involved in managing the scheme to other people. This can be someone inside your organisation as an individual delegate, like someone from HR or payroll. It can also be a third party like a financial adviser, accountant or payroll provider using NEST Connect, our online hub for delegated access. Clear communications We communicate clearly and transparently with you and with our members to support them as they save. We ve also got a range of templates to help employers comply with their duty to let their workers know about their new rights. This makes using NEST easier for you and means less time answering questions from your workers. Communication innovation of the year Auto-enrolment innovation of the year

15 Great value There are no charges for employers to set up and use NEST. We also keep charges low for all members, which means more value for money on contributions from you and your workers. Use NEST on its own or with another scheme Any employer can use NEST to meet their new duties. We re flexible enough to be your only pension scheme or work alongside another scheme you already have in place. You can use NEST for all your workers or just a particular group. Award-winning investment approach Our innovative NEST Retirement Date Funds have already attracted recognition from independent experts. Our investment approach is designed to meet the needs of all your workers throughout the time they save. We also offer a clearly labelled range of other funds, all with the same low charges. Best DC investment initiative Best use of DC and hybrid structures Best risk management Best investment strategy

16 NEST for savers An easy way to save for a pension NEST has been created to make it easy to save for your retirement. All you need to do is make contributions and we ll look after your money until you re ready to take it out. Designed for the mainstream We ve taken the time to talk to the sorts of people who ll be brought in to pensions through auto enrolment to find out what they want from a pension scheme. NEST has been created to do the things people have told us they want and need. Great value to make the most of your money NEST has low charges but gives you access to the sort of investment expertise that s typically only been available to higher earners and at a much higher charge.

17 Puts you in control if you want it You can use your online account to make extra contributions, start putting more away regularly or change the way your money is being looked after. However, you don t have to do anything if you don t want to. We ll still be working hard to make sure your money works for you. Easy to understand We know that pensions can be confusing. That s why we talk to you in plain English to explain what s happening with your money and what you can expect to get at the end. One retirement pot for life You keep control of your NEST retirement pot whether you stop working or change jobs. You can keep paying in if you like and if your new employer uses NEST then they can pay in too. That means you can take NEST with you from job to job.

18 NEST for advisers Built for auto enrolment NEST has been created to make it easy to comply with the new duties. You can recommend NEST knowing that it meets all the regulatory requirements and best practice guidelines from the government. NEST Connect We make it easy for advisers to offer a range of specialist services to employers with online delegated access. As a NEST Connect user, you can approach employers with your ready-made service proposition. You can offer to run the whole process for them, including managing enrolments, contributions, opt-outs, and ongoing maintenance. Or you can take on as much of the setting up and running of NEST as your clients want. High levels of governance Our trust-based structure means we re focused on making good decisions on behalf of our members. We also have robust systems in place to review and monitor transactions to avoid pricing errors and check that suppliers provide a good service. This means we can be sure that we re consistently making good investment decisions with our members interests at heart.

19 Take care of administration for your clients

20 Charges We re free for employers to use Members pay a 0.3 per cent annual charge on their total funds under management and a 1.8 per cent charge on each contribution as it s made. This is broadly equivalent to an annual management charge (AMC) of 0.5 per cent. If members stop contributing at any time they ll only pay the 0.3 per cent AMC. Economies of scale and smart operations mean that we can offer our members a much better deal than they might previously have been offered. Over a lifetime of saving with NEST our combination charge causes less drag on performance than either a standard stakeholder scheme charging the maximum or a scheme charging a flat 0.5 per cent AMC. This means our members will see more of their contributions in their retirement pot and less lost in charges. Many types of saver would be slightly better off with NEST s charge level than they would be with a 0.5 per cent AMC, although some savers who are closer to retirement may end up paying slightly more.

21 An individual s retirement pot is theirs for life

22 Looking after members money We ve created a sophisticated investment product that s suitable for the majority of investors. We aim to grow our members retirement pots ahead of the effects of charges and inflation while protecting them from market shocks. The straightforward experience for the member hides the sophisticated risk management and asset allocation that s at the heart of our approach. What members see: straightforward enrolment experience NEST Retirement Date Funds offering a tailored approach for every member clearly labelled fund choices that address the needs of a diverse workforce clear communications without overwhelming them with information same low charge across all funds.

23 What s happening out of sight: multi-phase investment approach that targets different risk and return objectives dynamic and sophisticated risk management designed to succeed in different economic conditions unique delivery system that provides flexibility and efficiency high levels of governance and clear alignment of long-term interests between investment managers and members.

24 NEST Retirement Date Funds Our research suggests that most people who ll start saving through auto enrolment don t want to make decisions about what happens with their money. They just want to know it s being well looked after and will be waiting for them when they re ready to buy a retirement income. We ve created our default option - the NEST Retirement Date Funds for them. At any time there are up to 50 NEST Retirement Date Funds. Each fund aims to grow members money over time and to get their money ready in the year they want to take it out. So, if the member wants to take their money out in 2040 their retirement pot will be held in the NEST 2040 Retirement Date Fund. Foundation phase Growth phase Consolidation phase 46+ 40 30 20 15 5 0 Years until retirement

25 Our other fund choices We ve worked very hard to make the NEST Retirement Date Funds a good choice for our members. However, we recognise that some will have their own views about what happens to their money. Without suitable options these people may well opt out of auto enrolment and have no savings for their future. To make sure that these savers can take part in NEST we ve created a range of clearly labelled fund choices. They offer members genuine alternative approaches at the same low charge as our NEST Retirement Date Funds. NEST Ethical Fund NEST Sharia Fund NEST Higher Risk Fund NEST Lower Growth Fund NEST Pre-retirement Fund

26 Who can use NEST? Any employer can use NEST to comply with their new duties. We have a public service obligation to accept any employer no matter how big or small. There are currently some limits on how NEST can be used. These limits will be lifted in April 2017. Limit on contributions For the financial year 2015/16 no more than 4,700 can be paid into a member s retirement pot each year. This figure will be adjusted annually. Based on the current minimum contribution of 2 per cent of qualifying earnings, this is more than enough to cover the minimum contributions for any worker no matter how much they earn. If you use an alternative earnings basis like total salary it still allows for minimum contributions of 2 per cent for workers earning up to 225,000 a year. Over the next few years the rate of minimum contributions that employers are required to make will gradually increase. This figure will be adjusted annually in line with average earnings. By the time it reaches the standard rate of 8 per cent of qualifying earnings in 2018 the contribution limit on NEST will be lifted. At this point members will be allowed to save as much as they want in NEST each year, although as with any pension scheme there are limits on the amount of pension saving that attracts tax relief.

27 Restrictions on transfers There are also restrictions in place around transferring retirement pots between NEST and other providers. There are a couple of exceptions. Currently, NEST members over 55 can transfer their retirement pot to another scheme to bring all their retirement pots together when they take their money out. NEST can also accept transfers in for pension credits granted as part of a divorce settlement and cash transfer sums where the member was previously a member of an occupational pension scheme for between three months and two years. From April 2017 all members will have the freedom to transfer retirement pots into or out of NEST. This will help our members consolidate their pension pots as they move jobs.

28 Case studies I m 26 years old so I d never been a member of a pension scheme before. My previous employer didn t offer a workplace pension scheme, but I was interested in saving for my future. I recognised that a comfortable state pension is not guaranteed in any way and I realised I needed to start thinking about my future, especially if I want to continue to do some of the things I do now when I retire. Nisha Minhas HR manager, Fluidata As an employer I encourage people to have a broad view about needing to have a pension and save for their future. We re all living longer but many of us are not saving enough for retirement - I encourage people to think ahead. I think that as part of the discussion as a responsible employer, we should encourage people to take opportunities like this, because at the end of the day we are making a contribution to their retirement. David Barras Chief executive, Positive Support in Tees

29 The traditional providers are still trying to find their place. Some are pricing based on what the contributions will be in 2018 and some are pricing now with a view to reviewing it in 2018. I think the thing with NEST is that you know you have always got the go-to provider at a set price. Richard Grover Corporate adviser, Windgate Benefit Solutions

30 NEST can be used in a variety of ways

Myth buster: putting the record straight 31

32 1 2 3 Myths about auto enrolment for employers Myth: There ll be a lot of work leading up to the deadline but then our work is done. Reality: Auto enrolment isn t just a one-time event. Once you re up and running you ll still have to calculate and pay regular contributions and keep assessing your workforce every pay period for anyone who needs to be automatically enrolled. Myth: Once we ve chosen our pension provider everything will be done for us. Reality: Pension providers aren t going to be able to do everything. Employers tell us that the main challenges they face are understanding how the regulations apply to them, assessing which workers are eligible and communicating the changes to their workers. Not all providers are ready to help you with these. Providers can make it easier though. At NEST for example, we ve put together a range of guides and tools to help employers understand what they ll need to do to get ready. Myth: Auto enrolment is a job for HR. Reality: Auto enrolment will probably mean you need to include a number of people within your organisation to help you implement the changes. Most employers we re working with include not only HR and their pension provider, but also their payroll provider and internal communication team. Payroll as a business function plays a key role, and you should never underestimate the importance of communication. Aside from meeting legal obligations to your workforce, a clear communications strategy will pay dividends by minimising queries.

33 4 5 Myth: Auto enrolment is just another project I ll give myself four months to sort it out. Reality: Our experience with large employers suggests it can take anything between six and 18 months to get ready. Using a workplace pension scheme will be relatively uncharted territory for many, so arming yourself with as much information as possible is critical. With plenty to think about when considering how to implement auto enrolment, our message is start early and plan ahead. Myth: I ll be able to use my existing pension scheme for auto enrolment. Reality: You should check with your provider as soon as possible whether your existing scheme can accommodate the new duties. The regulations impose significant new standards on schemes that many won t currently comply with. NEST is flexible enough to work alongside any other scheme you may have in place. This will make sure you ve covered your obligations even if you want to keep your existing scheme for some or all of your workers.

34 1 2 Myths about NEST Myth: NEST is a pension scheme that s run by the government. Reality: NEST Corporation is the trustee body that has overall responsibility for running NEST. As a non-departmental public body NEST Corporation is accountable to Parliament through the Department for Work and Pensions but managed independently of the government by its Trustee Members. That means the government can t tell NEST how to run the scheme or invest its members money and has no access to the money saved in NEST. NEST Corporation has a Chair and up to 14 Trustee Members. Together they form the Trustee of the scheme and they must comply with pensions trust law. This means that as the Trustee they have a number of legal duties, one of which is to act in the interests of the members of NEST. NEST and NEST Corporation are regulated by TPR. Myth: NEST is only suitable for small companies. Reality: NEST is open to any employer who wants to use it to meet the new duties. This means that employers of all sizes and sectors can use NEST for some or all of their workers. We re already working with thousands of employers, many of them very large household names such as the BBC, Timpson and Travelodge.

35 3 Myth: 4 5 NEST can t be used if an employer uses salary sacrifice. Reality: Employers can use NEST in conjunction with salary sacrifice. Myth: NEST can only be used to meet the legal minimums required. Reality: Employers can decide to offer more than the minimum requirements if they choose NEST or any other occupational scheme. The contribution limit on NEST will be lifted in April 2017. Myth: NEST will compete with existing pension schemes. Reality: NEST has been set up to work alongside existing workplace pension provision. It s specifically designed to meet the needs of its target market who aren t currently served by existing pension providers. According to research 69 per cent of employers in the private sector offer no workplace pension. NEST, together with the reform programme, will increase access to workplace pensions to an estimated 10 million people.

36 6 Myth: NEST is a bargain basement scheme of last resort. Reality: NEST has been set up to provide a high-quality, goodvalue pension scheme for the millions of workers who want to save for their retirement. We ve partnered with some of the leading global providers to create a scheme that matches the standards of schemes available in the private sector and often exceeds them. We ve designed our scheme operations to be easy to use for members and employers. NEST s scheme administration is delivered by Tata Consultancy Services (TCS), which is part of the Tata Group. TCS has more than 30 years experience in the UK insurance sector with 90 insurance clients including the top seven UK insurers. Its UK subsidiary, Diligenta, administers more than 3.5 million life and pensions policies. We work with some of the biggest names in global investment, including UBS Global Asset Management, State Street Global Advisors UK, BlackRock UK Institutional Business, HSBC Global Asset Management, F&C Investments, Royal London Asset Management and Legal & General Investment Management. NEST s fund administration partner is State Street Corporation, which provides fund administration services to more than 90 UK pension fund clients and administers more than 1,000 pension funds worldwide. NEST follows, and often leads, best practice in communications, governance and investment.

37 7 8 Myth: NEST will be difficult to administer. Reality: We ve designed NEST with ease of use in mind. Our online access means employers and members can manage their account when and where it suits them. We ve got online guides and tools that help employers set up and use the scheme and help members understand how to get the most from NEST. Employers can choose an individual delegate from within their organisation like someone from HR or payroll or they can choose an external adviser, account or payroll provider using NEST Connect to take care of some or all of the set-up and administration tasks for them. Myth: My money s not safe in a defined contribution scheme. Reality: NEST Corporation is run as a trust. Under trust law we have a number of legal obligations to our members, including acting in their interests. As a not-for-profit organisation, we re not here to make money out of our members we re here to manage and grow their money. Our members retirement pots remain their property, whatever else happens. Even in the highly unlikely event that NEST was to go out of business, the money in our members retirement pots would be protected. We invest our members money to make it grow and to protect it from both extreme market shocks and the effects of inflation. We actively manage our members exposure to investment risk aiming for the best return on their money without leaving them open to big swings in the markets.

38 9 Myth: NEST s low risk and low return investment approach is only suitable for low earners. Reality: We re not low risk or high risk. The goal of our risk management process is to make sure that the level of risk that members take with their money is properly rewarded. We look at the potential return offered by different asset allocations and assess them in relation to the risks they carry. We don t automatically chase the highest returns for our members but look for the investments that offer the best returns in relation to the level of risk. NEST has developed a sophisticated investment approach that s designed to provide our members with the opportunity for real growth. We re not satisfied with just making sure that our members get their money back. We want to put their money to work for them to ensure the value of their pot keeps pace with inflation and to add some extra returns on top.

39 10 Myth: NEST doesn t understand the pensions market. Reality: NEST has been created by financial services professionals with in-depth knowledge of the latest thinking about what makes a good workplace pension scheme. We ve also conducted an unprecedented amount of research into the needs of the new majority who ll be saving into a workplace pension scheme, many for the first time. Our ongoing program of research is helping us learn more and more about this huge new market and to evolve our approach. We ve been sharing our research through our NEST events and publications. We re leading new thinking through our annual NEST forum, where we invite leading researchers to share new thinking about how best to provide the right scheme to meet the challenges of the new duties.

NEST Corporation Riverside House 2a Southwark Bridge Road London SE1 9HA Email: stakeholder@nestcorporation.org.uk Visit our website nestpensions.org.uk NEST Corporation 2015. All rights reserved. This information doesn t constitute financial, investment or professional advice and shouldn t be relied on. Any form of reproduction of all or any part of this document is not allowed. NC008 KFMB 04/2015