Yet another post linked to my meeting with NEST a couple of weeks ago (see https://www.jelfgroup.com/blog/2010/12/my-meeting-with-nest-today/).

This is just a small scrap of info, but one of interest to many employers I suspect. It is part of the pension reform topic that may have been overlooked so far, and something that has been bothering me for several years (and still is, despite this post). It’s around the subject of those employers that already offer, or will offer, a company supported pension scheme which does not meet the ‘certification’ criteria.

But let’s not run before we can walk. For those new to this subject, or simply having trouble keeping up with the constant change in terminology, it’s probably worth covering down what I mean by the certification criteria. The certification process (also variously, and previously, known as ‘exemption’ or ‘qualifying’ test) is the process by which a pension scheme achieves, or surpasses, set benchmarks. In achieving certification, the employer will be able to offer the certified scheme to employees, and then automatically enrol employees to that scheme without also having to offer the option of NEST. In simple terms, certification means that an employer can continue to market it’s company supported pension scheme as a recruitment and retention tool, whilst also controlling all aspects of administration, fund selection, governance and third party services. None of this is realistically an option for NEST, which is a ‘one-size-fits-all’ arrangement.

I may cover-off the actual certification process in another post. But having got us all to the same page, here is the conundrum. Many employers already offer schemes with an employer contribution which is more generous than the legal NEST minimums (not difficult), but many such schemes may still fail the certification test. Let’s give you an example:

Option 1: Company A provide a company supported pension to their employees. The employer contributes 5% of full salary, and the employee is not required to contribute to join the plan.

Option 2: Employees at Company A are offered the standard NEST structure. The NEST scheme structure is radically different to option 1. The employer is only required to pay 3% of a lower salary (broadly based on Middle Band Earnings, the earnings on which full rate National Insurance contributions are based). The employee is also required to add 5% (including tax relief) of the same salary figure.

Given that Option 2 requires the employee to part with money from their monthly pay, and potentially get much less employer contribution in return, you will immediately see that Option 1 is likely to be the more attractive to most employees. However, Option 1 is likely to fail the certification test, as total contributions will not meet any of the definitions now being proposed for the certification process. In addition, the Option 1 scheme could also include eligibility criteria that falls outside of the certification process as well. Examples here could include an entry criteria of salary grading, or longer waiting period for new joiners. In theory all, or any, of these failures may result in the Option 1 scheme not being certified.

So what?

Well, and I would stress that this is only my reading of the situation at present, without certification of the Option 1 scheme, the employer may have to auto-enrol all employees into NEST, even if the ‘better’ (at least in terms of company contribution) company scheme is on offer to the employee as well.

Let’s then take this a stage further. It is possible that the legislation may require an employee who is already a member of the Option 1 scheme, to also be automatically enrolled into NEST as well. In effect, the employee could end up with two company contributions, to two different schemes.

Now that is clearly NOT the intention of the legislation, but I have yet to see any real evidence of resolution to this. I would hope that the final legislation will somehow allow for this oddity, as I see this as a pivotal point of concern for employers (and indeed the pensions industry) in the run up to, and compliance with, the auto-enrolment legislation.

I did however get a useful pointer on this subject from my meeting with NEST. Adrian from NEST suggested that employer’s could dictate in the employees contract of employment that company contributions will only be made to one pension scheme at any one time. This would certainly help protect the employer from the cost of double contributions.

But whilst this seems like a sensible step, I have this nagging concern that this could, in some way, be seen as ‘soft-coercian’ by the Department of Work and Pensions (DWP). The DWP will be policing the auto-enrolment process, and any employer who is seen to be offering a ‘way out’ of pension saving (or presumably the minimum saving levels set by legislation) may be subject to significant fines. Not a mistake that many reading this blog would like to explain to their line manager or shareholders!

So, to sum up:

As far as I can tell, this point is still a bit of a pig’s-ear, and I would hope will be addressed by the final legislation. At this stage, the only truly ‘safe’ option that I can forsee for employers that wish to use a company supported scheme (other than NEST), continues to be that the employer uses the remaining time until auto-enrolment to ensure that thier scheme (or schemes) will achieves certified status. In addition, I am strongly of the opinion that covering down the contract or employment issue mentioned above may be beneficial to employers, and that is perhaps something that can be introduced at an early stage (i.e. now), to minimise any problems nearer the auto-enrolment date for your organisation.

Hope this helps, and should you have a better insight into the above, please post a response so that everyone can be kept up-to-date.

Best regards

Steve