EU approves UK pension scheme NEST
The European Commission has approved under EU State aid rules the establishment of an occupational pension scheme in the UK, branded NEST, in the UK to ensure that all employees have access to an affordable pension vehicle.
The scheme, part of a wider pensions' reform in the UK, is meant for low to moderate income earners that the existing market does not serve. The Commission found the measure to be compatible with EU State aid rules, because NEST carries out a service of general economic interest (SGEI) and receives no overcompensation for providing it.
“Public services play a key role in Europe's model of society. The new occupational pension scheme will enhance the UK pension system, thereby making sure people, and their employers, provide adequately for old age, without unduly distorting competition in the marketplace," said Joaquín Almunia, Commission Vice President in charge of Competition Policy.
The European Commission has cleared under state aid rules the creation of the National Employment Savings Trust (NEST), a UK vehicle that will manage an occupational pension scheme mainly targeted at employees earning low to moderate income. Under UK pension reforms, from 2012 employers are under a duty to automatically enrol all eligible workers into a qualifying pension vehicle and pay a minimum employer contribution of 3%.
The scheme was notified to the Commission because of a loan granted by the government to fill the funding gap faced during the early years of the operations of NEST.
The Commission found that the measure is in line with EU state aid rules, and in particular with the 2005 framework for state aid as compensation for a service of general economic interest (SGEI). The Commission found that the three criteria of the SGEI Framework are fulfilled: (i) NEST carries out a service of general economic interest; (ii) it is entrusted by an official act that details all the elements of the service; (iii) there is no overcompensation for the provision of the service.
NEST aims at serving low to moderate earners and those working for smaller employers to make sure they save enough for their retirement. The market currently fails to supply suitable products to such small firms and individuals at lower earnings levels.
NEST will be funded by pension contributions, managed commercially and operated on the principle of capitalization. It will operate at nil overall cost to taxpayers. However, in order to cover the start-up expenses until the scheme becomes self-financing, NEST will borrow funds from the government. The loans will be refunded and the payback period is estimated to be in the region of 20 years.
The government will hand out the loan at a commercial interest rate. However, NEST will only have to pay the interest corresponding to the Government's cost of borrowing. Under the EU state aid rules, this difference is considered to be a soft loan and to constitute state aid. The amount of aid, depending on the number of members, will be in the range of £200-379 million (around €245-465 million). However, the Commission concluded that the aid would not overcompensate NEST for providing the public service and was therefore compatible with EU state aid rules.
The anticipated number of members joining the NEST is estimated to be between three and six million working people.