The government has announced that the restrictions on the National Employment Savings Trust (Nest) will be lifted in April 2017.
The restrictions include a cap on annual contributions, as well as a ban on transfers in and out of the scheme.
The announcement follows a government call for evidence on the restrictions. The Department for Work and Pensions sought views and evidence on whether the annual contribution limit and transfer restrictions on Nest were having unintended consequences.
In its response, published on 10 July, the government found a perception that the constraints were stopping Nest serving its target market.
Steve Webb (pictured), minister for pensions, said: “Targeting low-to-moderate earners that the market has traditionally forgotten, Nest has innovated with its use of language and investment strategy, and has ensured that everyone has access to quality pension provision.
“That is why I am not making any changes until 2017, when automatic-enrolment is fully rolled-out. At this point, I will lift the contribution limit so that Nest remains a force for good in the marketplace, driving up standards and best practice.
“The position on bulk transfers is much the same. As huge numbers of employers gear up to start to enrol their workers, we need Nest to focus on getting these people into pension saving. Once this is achieved and the market is established, the restrictions on bulk transfers will be lifted.”
Helen Dean, managing director of product and operations at Nest, added: “We are pleased the government has decided that, from 2017, members and employers will be able to use Nest as they would any other pension, with no specific restrictions on the amount they can contribute or the ability to transfer in and out.
“We welcome the certainty this announcement brings for employers and members. This means the restrictions will be lifted before minimum contributions rise to 5% in 2017.”
But Gregg McClymont, Labour’s shadow pensions minister, said: “Last year, the government blamed Brussels for not being able to lift the restrictions on Nest. We published legal advice to say this was not true.
“This year, it says that it can lift the restrictions after all. But not until 2017 and after the majority of people have already been auto-enrolled. The government has failed savers and pandered to special interests instead.”
Today’s decision to lift the restrictions on Nest contributions and transfers is great news both for employers and for workers. Employers are committed to contributing to high-quality pensions and this announcement will provide the clarity and simplicity we have been seeking for some time. It paves the way to make auto-enrolment the single platform of choice for pensions savings for many employers and employees. It also allows Nest to provide a future role as a pensions aggregator for savers.
Nest has an important role to play in making auto-enrolment a success, and it should not be held back from doing so.
There might have been a case for lifting these barriers earlier, but doing so from 2017 provides the clarity and certainty that employers, savers and the pensions market all need.
The changes to transfer rules and contributions are sensible. Employers will be able to treat Nest like any other pension on the market, and savers will be able to pool their small pension pots into a simpler and bigger fund.
Now that the government has started to take steps to remove the Nest restrictions it’s important that any bias towards Nest is also removed – sooner rather than later.
The government and The Pensions Regulator should look at how they communicate Nest to employers and make sure that they don’t overly influence their decision in selecting a scheme. Nest may also need to review its proposition to make sure it’s appropriate for a wider potential customer base.
Removal of the Nest restrictions, once again, highlights the need for employers to get professional advice.”
The artificial restrictions on Nest have been an unwelcome complication for businesses and their employees. From the outside, it never made much sense to have a set of rules which were peculiar to one particular pension scheme and it has only been the vested interests of some within the pensions industry which have argued for their retention.
There is still a significant risk of a pensions capacity crunch over the next few years, a restricted Nest would only exacerbate this problem. It would have been better if the restrictions could be lifted even sooner, but the government is making this happen as soon as it realistically can.
The removal of these restrictions is good news for both employers and employees.
The annual maximum of (currently) £4,500 that can be contributed each year and the ban on transferring savings in and out of the scheme has meant, for many employees, that they have not been able to consolidate all their pensions in one place. The government now seems to have accepted that even smaller employers and those on low-to-moderate wages could exceed the cap once contributions are automatically increased to 8% over a period of time.
Employers will also now have the certainty they need that Nest will continue to be an appropriate scheme for them and their workers when minimum contributions rise, or should they choose to contribute more.
Furthermore it is becoming increasingly clear that if the pot-follows-member policy is to work effectively, the ban on transfers in and out of Nest has to be removed as soon as possible.
Whatever the original reasons were for imposing the restrictions, in the present climate and with growing concern about the ever increasing savings gap, it makes no sense for any obstacles to be put in the way of encouraging and stimulating pension saving, and we should welcome the apparent government change of heart in this important area.
The only question that needs to be asked is why it is necessary to wait until 2017. The sooner this is implemented the better it will be for all concerned.
We very much welcome Steve Webb’s announcement that he plans to remove the annual contribution cap of £4,500 and the ban on transfers into and out of Nest as soon as Parliamentary time allows, even though we would ideally have preferred this to be sooner than the expected date of 2017.
Our recent poll of large employers found that 75% wanted these restrictions removed and it is easy to see why. Employers can now have certainty about their planning for the future and can select Nest with some confidence as a single, simple and low-cost scheme for all their employees.
The increased volume of contributions directed towards Nest as a result will give further economies of scale and drive down the costs for participants. This is good for consumers and supports the success of auto-enrolment.
Even when minimum contributions are fully phased in, they will never be more than £2,863. At the moment they can’t exceed £716. Where employers only do the bare minimum, there is therefore plenty of scope for individuals to top-up their savings without smashing through the £4,500 ceiling. But it’s still bizarre to tell a Nest member who wants to save £5,000 this year to help make up for years of not saving that they will have to set up a personal pension to take the final £500 of contributions.
The cap also means that Nest will not be a suitable vehicle for employers who want to go way beyond the minimum and have a single pension scheme for high earners and low earners alike. For example, it doesn’t work if you want to pay 10% on the whole of a £50,000 salary. However, that’s not the main reason why many large employers have chosen to stick with their own schemes rather than using Nest. In our experience, most employers contributing at this sort of level want a scheme they can brand as their own. Some of the largest employers also have the buying power to negotiate lower charges than Nest offers.
It’s hard to justify keeping this limit for another four years based on what is in individuals’ or employers’ interests. There are two obvious reasons why the government may have decided not to scrap it straight away. The first is that the European Commission cited the restrictions when approving the taxpayer-subsidised loan that Nest receives: the government knew that any decision it took could be challenged by Nest’s competitors and may have preferred announcing a compromise it thought everyone could accept to kicking off a period of uncertainty. The second is the capacity crunch among pension providers. The government appears to think that this could be more damaging if Nest’s attention became more focused on employers who other providers will in any case not turn away.
The government’s vision of pension pots following employees from job to job would be a non-starter if Nest pots could not be tipped into other employers’ schemes.
While Nest is generally a low-cost provider, more of its charges are taken upfront. This means it will charge more than other providers would for people who start saving in Nest but soon move their money elsewhere. It will be interesting to see how this interacts with emerging proposals for a charge cap. Will the government be relaxed about people paying around 2% on an account balance that only averages £500 or so, as that’s only around £10 in cash terms? In any case, if other providers can no longer assume that savers will stick around for the long haul, more of them may consider following Nest’s approach. At minimum, it could lead providers to make a judgement on the inflow and outflow of transfers and the volume of activity as this might affect their pricing and profitability.
Nest was designed to fill a perceived market failure, but in reality, competition in the auto-enrolment market has proved vibrant.
We have long held the view that the transfer and contribution restrictions have little impact on the type of employers and employees Nest was set up to serve. However, ensuring that auto-enrolment is a success is in everyone’s interest and the clarity that today’s announcement brings is helpful for both employers and the industry alike.
More importantly, as auto-enrolment continues apace, employers need to feel confident that the pension scheme they select for their employees is going to deliver on its promises over the long term. Not all providers and funds are fit for purpose and making this selection isn’t always easy. To help inform employers’ decisions, we encourage the adoption of a pensions quality mark.
We are pleased to see the government has stood by the original recommendations of the independent Making Automatic Enrolment Work review, to postpone the lifting of restrictions until 2017 to coincide with the completed role out of automatic enrolment.
We believe this announcement demonstrates the minister’s commitment to putting the success of automatic enrolment at the top of the agenda, even when under political pressure to move the goal posts. Automatic enrolment has been a success so far, with competition among providers driving better outcomes for consumers. Changing the game at this vital time could have distorted the market.
However, while we generally support the removal of the current restrictions in 2017, we think the framework that will be in place to ensure fair market competition after this should also be legislated now. Allowing a heavily subsidised state-backed provider to have free reign of the pensions market should not be taken lightly. For example, it is not clear, based on Nest’s current two-tier charging structure, at what charge Nest will take in transfers and how will this pricing be controlled? While it is understandable why the DWP should control Nest’s role during automatic enrolment, we would question whether the body that prescribes pensions legislation, and is responsible for Nest’s long-term success, should remain in charge of its oversight and operation in the market beyond 2017. There is an obvious conflict of interest, which would ultimately result in unfair competition. For these reasons, European legislation on competition and state aid could still prove problematic.
We would also urge the government to continue to strive for improved quality in pensions. With tens of thousands of smaller and medium-sized employers starting to automatically enrol their workers from next year, we must lay the framework for success. To meet this challenge, we support establishing a recognised quality mark for schemes, increasing the barriers to entry for trust-based schemes, simplifying the current legislation and standardising pension scheme charges.