Don't get caught in the NEST rush

David Davidson, director, Spence & Partners Actuaries and Dalriada Trustees

Don't get caught in the NEST rush

Finance | David Davison | 4 Jul 2011

David Davison offers advice on the challenges likely to be faced by charities when auto-enrolment for pensions becomes a reality.

As the clock continues to countdown to auto-enrolment, surveys continue to suggest that employers remain oblivious to the implications of this new piece of pension legislation. Even where there is some level of awareness, getting to grips with such a complex issue is proving problematic, and it is quite apparent that organisations have had little inkling of just how far reaching the implications for them and their staff could be. Charitable employers could find themselves in a particularly difficult position.

In this article I wanted to give not-for-profit employers some guidance about the issues they’re likely to face and the sort of audit process they should actively be undertaking. As a starting point organisations really need to consider what type of scheme they provide currently and how the new legislation may impact. 

No existing arrangement

While starting from scratch may appear relatively straightforward, the implementation of a scheme will require some form of infrastructure to be put in place which was not there previously. It is likely to result in increased costs if staff participate in a scheme (NEST or an alternative) and an increased administrative burden. Organisations need to plan for these increased costs and try to come up with a solution which fits their employee benefit needs and the level of administration they can comfortably deal with.  

Existing defined contribution arrangement

Organisations will need to review the scheme they already have in place and the scheme contributions being made to make sure they meet auto-enrolment requirements and that their scheme will integrate with any new requirements. This could be complicated where there are tiered or service-related contributions, or where schemes operate a salary sacrifice arrangement.

A significant potential issue could be where employers have an existing defined contribution scheme which tends only to attract higher paid staff paying higher contributions. If this is the case it will tend to be very competitively priced by the holding insurance company.

Companies need to consider what might happen if, for example, you had a scheme with 500 members paying average annual contributions of £5,000 per annum, and then you looked to add another 3,000 lower paid staff paying lower average contributions and potentially with a much greater staff turnover. Is the insurer going to be happy to maintain the terms or will they worsen them for the new joiners or indeed for everyone for the future? How would employers be able to explain this to existing staff? How do you integrate these new arrangements and what part does the NEST scheme have in linking with this? It’s all unlikely to be easy. Will employers be just more inclined to join a ‘race to the bottom’ purely for simplicity? What about employers who utilise transitory, seasonal or foreign workers and how might they be incorporated?  

Existing defined benefit arrangements

This is where things start to get really complicated. If organisations participate in a defined benefit arrangement will they be intending to use it as their default auto-enrolment vehicle? If so the additional costs could be very significant. It is not uncommon to see an employer with only higher paid staff participating in the DB scheme. Take an example of an employer with 300 staff and only 100 in the Defined Benefit scheme. This 100 could well have roughly the same total salary roll in as the 200 who don’t participate, so if all 200 joined that would double the pensions bill plus add considerable administrative complexity.

It would also more worryingly mean that liabilities are growing at twice the rate!! How could you assess what it’s likely to cost as are these staff actually likely to join given the potential level of contribution to DB? Would they join a DC with lower contributions? What about the administrative impact of auto-enrolling them every few years? If you had lots of older staff joining this could push up the average age of the scheme and impact on the defined benefit funding rate.

If you do not want to use the DB scheme as the default you would then need to close it to new members. If a scheme is closed to new entrants it will mean that the average age will be rising and therefore costs will increase. Within an LGPS arrangement this is usually achieved by moving the organisation to a ‘closed pool’ with higher contributions. This will increase costs initially although as the DB salary roll reduces over time as individuals leave the monetary amount is likely to reduce.

Within other multi-employer schemes there tends to be an additional cost either in the form of a levy or an increase to the contribution rate. Even if you leave the scheme open but people just don’t join there is a risk the scheme will be viewed as being closed and the levy added in any case.

A further problem for smaller employers in these multi-employer schemes is that they need to have active members to avoid triggering a cessation debt. The cessation deficit will be many times the level of the on-going deficit and many small charities will be unable to afford this, potentially driving them out of business or forcing them to come up with convoluted arrangements to make sure they keep at least one active member in the scheme.

The degree of staff take-up could also vary widely between schemes which will have an impact on costs. Clearly any impact is likely to be much more dramatic in schemes where the existing take up level is currently very low.

Multiple existing arrangements

All of the above gets even more complicated where there are already multiple arrangements in place. For example I’ve seen charities who participate in a local government scheme (LGPS) and another multi-employer scheme. Some may even have a defined contribution arrangement as well.

This is all really complex and many charities are oblivious to the implications at this stage. Indeed many charities continue to run DB schemes without being fully aware of the risks they face. There are already proposals in place to revise public sector pensions and these changes also need to be incorporated as part of this process.

Each organisation really needs to audit what they have and consider the implications with their corporate adviser and see what steps need to be taken. Whilst an implementation of 2012 or even 2014 may appear to be some time away it will be amazing how quickly time will pass, and decisions with pensions tend not to be made quickly.

David Davison is a director of Spence & Partners Actuaries and Dalriada Trustees



[Cancel] | Reply to:

Close »

Community Standards

The community and comments board is intended as a platform for informed and civilised debate.

We hope to encourage a broad range of views, however, there are standards that we expect commentators to uphold. We reserve the right to delete or amend any comments that do not adhere to these standards.

We welcome:

  • Robust but respectful debate
  • Strongly held opinions
  • Intelligent relevant discussion
  • The sharing of relevant experiences
  • New participants

We will not publish:

  • Rude, threatening, offensive, obscene or abusive language, or links to such material
  • Links to commercial organisations or spam postings. The comments board is not an advertising platform
  • The posting of contact details for yourself or others
  • Comments intended for malicious purpose or mindless abuse
  • Comments purporting to be from another person or organisation under false pretences
  • Gratuitous criticism, commentary or self-promotion
  • Any material which breaches copyright or privacy laws, or could be considered libellous
  • The use of the comments board for the pursuit or extension of personal disputes

Be aware:

  • Views expressed on the comments board are left at users’ discretion and are in no way views held or supported by Civil Society Media
  • Comments left by others may not be accurate, do not rely on them as fact
  • You may be misunderstood - sarcasm and humour can easily be taken out of context, try to be clear


  • Enjoy the opportunity to express your opinion and respect the right of others to express theirs
  • Confine your remarks to issues rather than personalities

Together we can keep our community a polite, respectful and intelligent platform for discussion.


David  Davison

David Davison is head of public sector, charities and not-for-profit at Spence & Partners, director of Dalriada Trustees and Civil Society Media's dedicated pensions blogger.

Ian Allsop (66) John Tate (59) David Davison (51) Robert Ashton (40) Andrew Hind CB (24) Tania Mason (23) Gordon Hunter (17) Daniel Phelan (15) David Ainsworth (15) Vibeka Mair (12)
David Philpott (10) Niki May Young (8) Rui Domingues (8) Celina Ribeiro (7) Andrew Chaggar (5) James Brooke Turner (4) Sir Stuart Etherington (4) Kate Sayer (3) Jeremy Swain (3) Garreth Spillane (3) Alistair Gibbons (3) Ian Clark (3) Claris D'cruz (2) Stephen Lloyd (2) Richard Maitland (2) Adrian Beney (2) Iain Pritchard (2) Pauline Broomhead (2) Martin Brookes (2) Tesse Akpeki (2) Nick Brooks (2) Stephen Hammersley (2) Rosie Chapman (2) Geetha Rabindrakumar (2) June O'Sullivan (2) Kirsty Weakley (2) Dan Corry (2) Peter Holbrook (2) Belinda Pratten (2) Simon Steeden (2) Jonathan Bruck (2) Dan Gregory (2) Carolyn Sims (2) Making Good: The Future of the Voluntary Sector (2) Mark Astarita (1) Don Bawtree (1) Sir Stephen Bubb (1) Victoria Cook (1) Lindsay Gray (1) Rachel Holmes (1) Nick Ivey (1) Iona Joy (1) John Kelly (1) Michael King (1) Heather Lamont (1) Lucy McLynn (1) Chris Oulton (1) Julian Rathbone (1) Socrates Socratous (1) Richard Weaver (1) Karl Wilding (1) Richard Williams (1) Roger Chester (1) Matthew Bowcock (1) Joe Saxton (1) Reuben Turner (1) Martin Farrell (1) Paul Gibson (1) Jonathon Grapsas (1) Andrew Scadding (1) Simon Hebditch (1) Su Sayer (1) Debra Allcock Tyler (1) Martin Birch (1) Mark Hallam (1) Jonathan Lewis (1) Sara Llewellin (1) John Low (1) Dame Mary Marsh (1) Ruth Murphy (1) Colin Nee (1) Julia Unwin (1) Kate Rogers (1) Malcolm Hayday (1) Filippo Addarii (1) Kimberley Scharf (1) Jakes Ferguson (1) Jessica Sklair (1) Joe Turner (1) John May (1) Julian Blake (1) Andy Williamson (1) Malcolm Hurlston (1) Andrew Samuel (1) Chester Mojay-Sinclare (1) Paul Amadi (1) Luke Fletcher (1) Peter Mitchell (1) Billy Dove (1) Andrew Ketteringham (1) Jackie Turpin (1) Lynne Robb (1) Jonathan Crown (1) Paul Emery (1) Ruchir Shah (1) Pesh Framjee (1) Sukhvinder Kaur-Stubbs (1) Moira Protani (1) Vicki Prout (1) Michael O'Toole (1) Dawn Austwick (1) Lisa Clavering (1) Paul Farmer (1) Neelam Makhijani (1) Logan Anderson (1) Andy Rich (1) Sharon Martin (1) Asheem Singh (1) Leigh Daynes (1) Abdurahman Sharif (1) Lynne McMahon (1) Richard Caulfield (1) Ashley Horsey (1) Andrew O'Brien (1)
Less +++ More +++

Social Charity Spy: Scope launches spoof video for charity shop donation drive

3 Jul 2015

Both Scope and Terrence Higgins Trust have produced eye-catching videos to highlight their current campaigns...

Social Charity Spy: St Gemma's Hospice's wedding dress appeal goes viral

12 Jun 2015

This week a social media call-out leads to an unexpected windfall for St Gemma’s Hospice, Plan UK launch...

Could charities be hoodwinked by technology?

1 Jun 2015

Polling errors at the general election show that human judgement is still critical in using digital technology,...

Society is changing in ways that have specific consequences for volunteering

22 Jun 2015

Gillian Guy, chief executive of Citizens Advice, explains why charities need to respond to changes in...

Society Diary: Miley Cyrus takes off her clothes, cuddles a pig and talks about charity

12 Jun 2015

Our weekly round-up of interesting and outlandish information, collected from the corners of the charity...

Is it time for charities to fight back on chief executive pay?

10 Jun 2015

The charity sector has suffered in silence through repeated attacks on its leaders over their pay, but...