Workplace pensions: the alternatives to NEST
Auto-enrolment, also known as workplace pensions, is well underway. It's the biggest pensions revolution in history.
The Government scheme requires employers to enrol eligible workers (aged between 22 and the State Pension age and earning over £10,000 a year) into a workplace pension.
Under the new rules employers and the Government contribute to the pension, on top of an employee's own pension contributions.
Workplace pensions were launched back in October 2012 to address the problem of people living longer but failing to save enough money for retirement.
It's being introduced gradually, with the biggest employers first, while small employers still have a couple of years before they need to enrol their staff.
Over five million workers have been enrolled so far, but by 2018 as many as nine million employees across the UK will be automatically entered into a pension scheme by their employer.
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Saving a NEST egg
The National Employment Savings Trust (NEST) is the auto-enrolment programme set up by the Government to support the launch of the auto-enrolment initiative.
NEST is effectively a public body that's accountable to the Department for Work and Pensions. But it's far from perfect.
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 firm behind The People's Pension is B&CE, a company which has managed workplace pensions – particularly in the construction sector – for more than 30 years. So there's some decent pedigree there, with more than 9,000 firms currently using B&CE to manage assets worth more than £2.2 billion.
JD Sports, Pret A Manger, Matalan, Wilkinson and Marriot UK are just some of the big companies that have chosen The People's Pension for their auto-enrolment responsibilities.
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 Balanced fund unless you ask to be moved to a different investment profile. 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, including a Sharia fund and an ethical fund. You can switch between funds without charge.
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 if you're auto-enrolled with the People's Pension you can transfer in money from other pensions without penalty. You won't be able to do this with NEST until April 2017.
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 £4,600 (in 2014/15 terms) to be paid into a pot each tax year. NEST plans to lift these restrictions by April 2017.
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NOW:Pensions
NOW:Pensions is backed by Danish retirement specialists ATP, which has run the Danish National Pension for more than 45 years, and is coupling that Scandinavian experience with people like Nigel Waterson, the chair of the board of trustees, a former Shadow Pensions Minister.
Fitness First, Cineworld Cinemas and Randstad are just a few companies which have chosen Now:Pensions for their auto-enrolment obligations.
How is your money invested?
NOW:Pensions 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.
NOW:Pensions employs two distinct phases over the life of your pension saving: the savings phase, and the pre-retirement phase.
During the savings phase, your cash will be invested in the classes listed above through the Now: Diversified Growth Fund. 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 contained in the NOW: Retirement Countdown 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 with NOW: Pensions. 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.
Smart Pension
Smart Pension is the latest contender to NEST. It was founded by experienced finance and technology professionals in 2014 and has been designed particularly to support smaller companies facing the challenges of auto-enrolment.
Its main selling point is it's simple and quick for employers to set up. Using a range of processes to speed things along like e-signatures Smart Pension says it can sign up, enrol employees and get a company fully compliant within a matter of minutes. You can even do it from your mobile phone.
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How is your money invested?
To make things simple there's one fund called the Smart Pension Master Trust.
A team of independent professional trustees with decades of experience between them invest the scheme's assets as per the trust deeds at the lowest possible cost.
The trustees also select the investment manager, responsible for investment strategy of the Smart Pension Master Trust and its assets. Currently Lewis Capital Management, a pioneer in the application of behavioural sciences to investment management, merging traditional techniques with behavioural finance and investor psychology is on board.
The Lewis Capital Management team invests pensions funds in the largest blue chip funds (such as Legal & General) to provide protection as well as sourcing opportunities for growth for a fully diversified default fund.
Like the other schemes mentioned Smart Pension employs a different approach as people come up to their retirement age. Risk and volatility are reduced by shifting the proportion invested into cash and fixed income over equities.
Charges, transfers and contribution caps
Employees enrolled on the scheme pay a monthly Assets Under Management (AUM) fee of 0.75% per annum of funds under administration. This is line with the UK fee cap coming into force from April 2015. Plus Smart Pension charges a direct debit fee of 1% or up to a maximum of £2 as a proportion of all employees' contributions.
For example, if 20 employees earning the average UK salary of £26,000 are each contributing a total of 8% of their qualifying earnings to their workplace pension, the combined total of their qualifying earnings paid every month will be £2,697.07. The direct debit fee of £2.00 will amount to 10p per employee or 0.07% of the employee's pension contribution that month.
Smart Pension allows fee-free transfers and hasn't got a cap on contributions.
Other providers
Employers aren't obliged to work with any of these companies. If your employer already offers a pension with another provider, there's a good chance that your employer will stick with that provider.
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