Follow this topicWorkplace pensions: the alternatives to NEST
Auto enrolment into pensions is here for millions of workers, but NEST is not the only option. We take a closer look a its main rivals NOW:Pensions and The People's Pension.
Auto enrolment - the biggest pensions revolution in history is here. From 1st October, as many as nine million employees across the UK will be automatically entered into a pension scheme by their employer.
Most adults will follow in the years to come.
What is auto enrolment?
The UK has a pensions problem. Essentially, we are all living longer but failing to save enough money to pay for ourselves in retirement. Auto enrolment – being automatically entered into a pension scheme – is supposed to redress that balance.
The new rules require employers and the Government to contribute to that pension, on top of our own pension contributions.
You can get a full explanation of how it all works in NEST auto-enrolment pension: what it means for you.
Saving a NEST egg
The National Employment Savings Trust (NEST) is the auto enrolment programme getting all the attention. That’s no huge surprise. After all NEST is effectively a public body that’s accountable to the Department for Work and Pensions. But it’s far from perfect, as we explained in How NEST will invest your compulsory pension.
And it’s not the only auto enrolment scheme provider that employers can use. Indeed, the scheme that your employer chooses to use can make a difference to the pension pot your finish with.
Let’s take a look at the main alternatives.
The People’s Pension
The People’s Pension got some attention last week when food outlet Pret A Manger announced it had gone with The People’s Pension for its auto enrolment responsibilities.
The firm behind The People’s Pension is B&CE, a firm which has managed workplace pensions – particularly in the construction sector – for more than 30 years. There’s some decent pedigree there, with more than 6,000 firms currently using B&CE to manage assets worth more than £1.8 billion.
How is your money invested?
There are three profiles to choose from which will determine how your money is invested: Cautious, Balanced and Adventurous. The names tell you all you need to know about the level of risk involved with the investment strategies of each.
You’ll be entered into the Balance fund unless you ask to be moved to a different investment profile. You can move between funds up to twice a year without being charged.
And if you’re more confident about investing generally, you can actually self-select the exact funds you want to invest in from a selection of seven, as well as a Sharia fund and an ethical fund.
If you’ve stuck to one of the three main profile funds, your money will automatically be moved into more secure investments on a gradual basis from 15 years before your planned retirement date. This doesn’t happen if you have chosen to self-select.
Charges, transfers and contribution caps
One of the big attractions of The People’s Pension is that it is a not-for-profit organisation, which means that the charges are very low – there’s just a simple, flat 0.5% annual management charge to pay. That’s much easier to get your head around than the NEST fee structure of 0.3% per year plus a 1.8% contribution charge.
It’s also worth noting that unlike NEST, if you are auto-enrolled with the People’s Pension you can transfer in money from other pensions without penalty.
What’s more, there is no limit to the annual contributions you can make to your pension. This is in stark contrast to NEST, which allows no more than £4,400 (in 2012/13 terms) to be paid into a pot each tax year.
NOW: Pensions
NOW Pensions is backed by Danish retirement specialists ATP, which has run the Danish National Pension for more than 40 years, and is coupling that Scandinavian experience with people like Nigel Waterson, the chair of the board of trustees, a former Shadow Pensions Minister.
How is your money invested?
NOW: has used its experience in Denmark to put together an interesting investment approach. Indeed, there’s just one default investment plan.
Your money is split across five different risk classes, each with different risk characteristics.
The Rates class: invests in Government and other bonds, which have a low credit risk. Also invests in interest rate derivatives.
The Credit class: invests in bonds with credit risk or in funds with similar investments.
The Equity class: invests in equities, equity derivatives or in funds with similar investments.
The Inflation class: invests in index-linked Government and other bonds, as well as inflation and interest rate derivatives.
The Commodity class: invests in commodity derivatives or in funds with similar investments.
This is called the diversified growth fund.
As with NEST, NOW: employs three different phases over the life of your pension saving: the savings phase, the pre-retirement phase and the retirement phase.
During the savings phase, your cash will be invested in the classes listed above. Once you reach the pre-retirement phase (ten years before your planned retirement date, though you can change this to five or 15 years before that date) your money will start being moved into less risky investments. When the retirement phase is reached, just 20% of your retirement cash will be invested in the diversified growth fund.
This lack of choice may concern some, but NOW: points to its excellent track record of running pensions in this way. And its own research found that the vast majority of people who are auto enrolled in a pension simply stick with the default option anyway.
Charges, transfers and contribution caps
Simplicity and transparency are the key words when it comes to charges, NOW tells me. There’s a 0.3% annual management charge, coupled with a monthly administration fee of £1.50 (which falls to 30p for those earning less than £18,000 a year, at least initially).
Transfers can be made absolutely free if handled online, and again there is no cap on contributions.
Other providers
Employers aren't obliged to work with one of these three companies. If your employer already offers a pension with another provider, there's a good chance that your employer will stick with that provider.
Varying approaches
That said, NEST, NOW: Pensions and The People’s Pension will probably be the main players and they offer three quite different approaches to managing your auto enrolment pension. Charges vary too. So make sure you know exactly which provider your employer plans to sign up with, and why.
More on pensions and auto enrolment:
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