Levelling down and your pension fund

As well as London hosting the Olympic Games, 2012 sees the introduction of the new National Employment Savings Trust (NEST).

This is a compulsory workplace pension scheme, with employers having to make contributions in addition to employees.

Unless your employer already has in place an eligible pension scheme, they will have to contribute a minimum of 3% to NEST, with the employee contributing 4% and an additional 1% tax relief from HMRC.

There is a real fear that, when NEST is introduced, employers will close existing pension schemes or reduce their contribution levels in line with these levels. This course of action is known as ‘levelling down’.

New research from The Association of Consulting Actuaries has warned that 41% of larger employers are already considering this levelling down option to reduce their pension contribution costs.

A recent study from the Department of Work and Pensions found that only one in ten employers currently offer a pension scheme meeting the minimum requirements, so this risk of levelling down does not apply to the majority of companies.

It could still mean that those employees who already benefit from quality pension contribution levels see these cut at the same time as other employees get access to employer pension contributions for the first time.

Another fear about the introduction of mandatory employer pension contributions is that employers will simply freeze pay to recoup the cost of their contributions to NEST. Whilst they might face strict Union opposition to such a move, it is unlikely that many employers will relish the thought of increasing their total payroll costs in the current economic environment.

As with all things financial, planning ahead is essential.

For employees, it is important to find out from your employer what their intentions are with regard to NEST. Will they be replacing any existing pension scheme or reducing contributions?

Employers should also seek advice to understand the exemption rules if they have an existing pension scheme and to ensure they properly communicate any changes with their workforce.