Application of pension legislation to the NEST CorporationFriday, March 18th, 2011
New Regulations have been made and come into effect from 6 April 2011 that disapply certain aspects of pension legislation from the National Employment Savings Trust (NEST) Corporation. NEST is the pension scheme that has been established to assist up to a million UK employers comply with their automatic enrolment obligations from 2012. The NEST Corporation is the trustee of the NEST scheme.
NEST will operate broadly within the same legal framework as applies to any other trust-based defined contribution occupational pension scheme. There are, however, some areas of existing pension legislation that would not be effective given the unique nature and scale of the NEST scheme.
The differences that are given force by the new Regulations are as follows:
1. Current pension legislation requires a scheme trustee to provide information to members, beneficiaries, recognised trade unions and others regarding how employer contributions are determined and how member contributions, if any, are calculated. Each of the up to a million employers using NEST can decide how contributions to the scheme are calculated, provided they equal at least 8% of the jobholder’s qualifying earnings. NEST will not record that information and, as a result, cannot meet the existing disclosure of information requirements. Instead, NEST is required to provide general information about the level of contributions that members and employers are required to pay. NEST will, in addition, encourage individual employers to provide more specific information to its scheme members.
2. Pension legislation also restricts pension schemes from investing more than 5% of the scheme’s resources in any one employer, to protect members’ pension funds from the scheme over-relying on one employer’s financial performance. This provision will apply to NEST Corporation. However, pension schemes are required to set out in their annual report how much is invested in all employer-related investments. In view of the potential number of employers that will participate in the NEST scheme, it would be impractical for NEST Corporation or its fund managers to disclose all employer-related investments. Instead, the Corporation
- is required to disclose its one hundred largest investments in the annual report, and to show which of these investments are with employers taking part in the scheme,
- is required to disclose, like all other occupational pension schemes, employer-related investments that exceed 5% of the scheme’s resources, what plans they have in place to reduce the excess, and the timeframe involved in reducing the excess, but
- is not required to identify where investments are associated or connected with employers who take part in the scheme.
3. Pension legislation prohibits borrowing by large occupational pension schemes for any purpose except on a temporary basis to help with cash-flow. However, NEST does not have a sponsoring employer who would normally fund the scheme set-up costs, nor does it have access to group capital like an insurance provider. Initially, NEST will rely on borrowing to meet its set-up and early years’ running costs, with the Government acting as lender. The new Regulations, therefore, allow NEST Corporation to borrow for the specific purpose of meeting the costs of establishing, administering and managing the NEST pension scheme and, if necessary, to provide temporary cash-flow.