We ask the experts for their answers … have your say online at the Employee Benefits forum.
Tim Middleton, technical consultant at the Pensions Management Institute:
When the charging structure for the national employment savings trust (Nest) was announced, many commentators were surprised. Combining an annual management charge (AMC) with a contribution charge of 2% will mean the scheme’s first members will find Nest an expensive experience.
For many employers, the response is obvious: selecting a group stakeholder plan as the auto-enrolment vehicle will result in a more modest charging structure. Many group stakeholders have an AMC below 0.5%, and existing pension providers can offer far more investment options to members than the fund range currently proposed for Nest. On paper, therefore, it would appear employers can adopt a more attractive alternative for auto-enrolment than Nest, and the reforms represent a lucrative commercial opportunity for traditional pension providers.
But things won’t be so simple in practice. Employers seeking alternatives to Nest are more likely to have experience and understanding of workplace pensions and access to professional advice. The problem is, the 2012 reforms will require many employers – notably, smaller ones – to address pensions for the first time. Many will choose Nest because it will be the simplest and safest way to meet the new requirements. Moreover, smaller employers will not be able to negotiate stakeholder charging structures much below those dictated by statute.
Jobholders who are auto-enrolled into a qualifying scheme are unlikely to be aware of the effects of charges on their investments, and so could be entirely unaware that more competitive alternatives may be available.
Robin Hames, head of technical, marketing and research at Bluefin Corporate Consulting:
Designed for low to moderate earners, Nest has a cap on contributions to ensure it stays true to this purpose. So, for many employers, it may have limited appeal.
However, it is an option to be considered if either all the workforce is relatively low-paid or as a scheme for certain sectors of staff. However, these individuals normally represent most employees who currently opt out of their employers’ scheme, where one is available.
From a product provider perspective, group pension schemes are costly to establish and take time to break even, especially if they have a high level of irregular savers. The Personal Accounts Delivery Authority (Pada) has, perhaps unsurprisingly, had to conclude that an initial charge is necessary for Nest.
Nest’s charges will be a combination of a 2% initial and 0.3% annual management charge. Our actuaries concur with Pada’s assertion that this equates to a 0.5% annual charge for most savers under the age of about 50.
Unfortunately, the vast majority of us are not actuaries. The simple reality is, we are loss-averse. We do not like to see our savings fall in value, whatever the reason. For those already distrustful of pensions, an upfront charge is likely to increase their scepticism.
So for an employer operating a good-quality pension scheme with no upfront charge, it is difficult to see why it would want to complicate matters by adding another scheme for some employees that carries such a disincentive.
At the other end of the scale, employers that do not currently offer a scheme and might wish to see a high level of opt-outs to avoid additional costs, may see such a charging structure as a good reason to choose Nest.
Paul Macro, senior consultant at Towers Watson:
Quite possibly, because the psychology is bad. Pada has dropped strong hints that the investment strategy will turn conventional wisdom on its head and be risk-averse in the early years because it does not want to put people off saving. But taking £2 out of every £100 saved will have precisely this effect.
For this reason, few schemes currently have a charge like this, so, on the face of it, it could deter employers from using Nest where they may have been borderline up until now. But Nest could set a precedent for other schemes to follow. We might well see group personal pensions reintroduce a bid/offer spread type structure to bring forward the break-even point for the providers. However, it is doubtful that it will make any difference to those employers currently without a pension scheme. If an employer chooses to use Nest, employees will not usually be able to have employer contributions go to an alternative vehicle they might rather save in. So even if Nest does have higher charges, it would generally make sense for employees to go with it if they want to save, even if they do not like it.
The proof of the pudding will be what members and employees actually get for the charges. What level of support and communications will Nest provide?
There is a risk of a downward spiral if Nest turns out to be unpopular. If fewer people use Nest, that will increase the period over which the government loan is repaid, and so increase the length of time the 2% charge applies – or even require an increase to it.