The House of Commons’ work and pensions committee has recommended lifting the contribution cap and the pension transfer ban on the operation of the national employment savings trust (Nest).
The report, Automatic enrolment in workplace pensions and the national employment savings trust, recommended removing the two restrictions as a matter of urgency.
The committee said that the cap on the annual contributions an employee can make into a Nest scheme could result in severe complexity for organisations, because it means that employers with higher-paid staff could not use Nest as their single pension scheme.
The committee said that the ban on employees transferring existing pension pots into Nest will be disruptive, both for the employees who would like to consolidate separate pension pots into their Nest scheme and for employers that would like to operate a single workplace pension scheme.
Anne Begg, the chair of the Work and Pensions Select Committee, said: “Auto-enrolment is a welcome reform that will encourage high participation in workplace pension schemes.
“We welcome the government’s overall approach and have made several recommendations designed to help make sure the programme is a success.
“By lifting these two key restrictions placed on Nest, the government would remove barriers that might currently prevent employers from choosing Nest as their pension scheme, as well as making it easier for employees to bring together the other small pension pots they are likely to have.
“This will help reduce the multiple administrative charges that many people pay and help them to understand the total retirement savings they will have built up.”
The report also:
- Urged the government to proceed with its plans for state pension reform and introduce a bill to this effect at the beginning of the 2012-13 parliamentary session.
- Recommended that, from 2013 onwards, if some auto-enrolment pension schemes still have hidden charges, or charges that represent poor value for money, the government should use its powers to intervene.
Read also EB Summit: Shadow pensions minister calls for Nest restriction cull
Read more articles on auto-enrolment and workplace pensions
The Work and Pensions Select Committee report shows the strong all-party support for lifting the restrictions on Nest.
These restrictions have never been in the interests of employees and were a concession too far to vested interest lobbying by the financial services sector.
Nest has already shown that it will work in the interests of low to medium earners, which was the only argument with any merit for the restrictions.
The government should lift them as soon as possible.
There is a strong social need for a national saving scheme among the low paid and the hitherto un-pensioned, the majority of whom may be working for small employers.
These restrictions keep Nest tightly focussed on the areas where the nation needs it.
Removing the restrictions before the scheduled review in 2017 would risk Nest becoming distracted to the detriment of the very consumers it was created for.
There is a real danger that the smallest employers will not be able to find a private pension scheme, and that is why over £100 million of taxpayers money has been spent creating Nest.
It would endanger the whole auto-enrolment programme if Nest were allowed to go off in other directions now and neglect the very people it was created for.
The committee’s endorsement of auto-enrolment plans is welcome. The change is a key part of developing a sustainable pension system in light of the longer, healthier lives we are enjoying. We will all need to work for longer and, crucially, save more.
The committee is also right to support a simpler state pension and to encourage government to look again at the interaction between long-term savings for pensions and saving for housing.
However, with the introduction of auto-enrolment just a few months away, we would caution against making further changes to what is a carefully balanced regulatory framework.
The review of Nest scheduled for 2017 is the right time to address issues, such as which controls have placed on saving into Nest.
It is disappointing that the committee has not focussed on the real reason why Nest may be struggling to compete with low-cost private sector competitors, which is its high and complex charging regime.
We believe that it would be wrong to review the contributions cap on Nest before the original planned date of 2017, especially given that staging dates for some schemes have been pushed back.
By 2017, existing providers will have aligned their systems, processes and business models with auto-enrolment requirements, enabling a level playing field for competition.
Removal of the cap would allow contributions at a rate higher than those for whom the product was initially designed, and Nest would need to ensure product features, investment options and suitable support was available for this wider market.
However, we would expect many employers with a larger proportion of higher paid employees to have an existing scheme in place, which would offer the customer experience and return on investment in terms of employee attraction and retention that employers want from their core pension offering.
We fully support the removal of restrictions around transfers to facilitate the amalgamation of small pension pots, both for Nest and also into other employer-sponsored pension schemes. For larger transfers we believe that a review should take place in 2017, allowing time for fund performance to be judged and understood in relation to charges.
It is going to be crucial for the success of auto-enrolment that we can demonstrate to savers that they will be getting good value for money. We will continue to support the industry in working towards the best solution for achieving this.
Everyone deserves access to a good workplace pension that comes with their job, and auto-enrolment is a once-in-a-generation opportunity to get people saving for their retirement.
The economic landscape has changed significantly since the reforms were legislated and we can see the case for the restrictions on Nest to be removed at the current time.
We all want Nest to be a success – it is a key part of the UK savings picture going forward. And other players have now entered, so the risk of levelling down has weakened.
However, the government still needs to meet its wider commitment to reinvigorate workplace pensions. It must stop prevaricating and press ahead with plans to introduce a flat-rate, single-tier state pension. And it needs to abandon any planned changes to pensions tax relief in the Budget.
The restrictions have played their role in ensuring that Nest developed well-designed and low-charge pension products focused on lower earners.
The committee makes a compelling case that lifting the restrictions on Nest would now be to the benefit of employees and employers.
The government needs to move from consideration to action.
The restrictions were initially put in place to avoid impacting employers’ existing schemes. Removing these restrictions might result in employers shutting down perfectly good schemes to move to Nest.
While we expected the restrictions to be reviewed in around 2017, it is concerning that this may now be brought forward to before the first official staging date of October 2012.
Lifting the restrictions to allow higher contributing members to use Nest should prompt Nest to reconsider its investment range as these members are unlikely to be satisfied by the investment options on offer.
Lifting the ban on transfers would ease the consolidation of small funds and makes sense. However, as things currently stand, employees can only access Nest through their employer, so a much wider change would be needed for employees to be able to set up a Nest account for consolidation purposes if their employer was not using Nest.
It is important to bear in mind though that low cost does not always equal value for money, and certainly does not necessarily produce the best outcome for members. The idea of a ‘compare-the-market’ type website is an interesting idea, but unlikely to be helpful to employers who may come under pressure from employees to change providers based purely on cost when there may be other very good reasons to stay put.
Price is important, but not the absolute single factor in determining the ultimate benefits of a pension arrangement.