The government has published a call for evidence on the impact of two statutory restrictions on the National employment savings trust (Nest).
It is seeking views and evidence on whether the annual contribution limit and transfer restrictions on Nest are influencing employers’ choice of auto-enrolment pension scheme in a way that was not intended.
Steve Webb, minister for pensions, said: “We are already seeing the positive effect that Nest is having on the world of pensions. Workers are being signed up for workplace pension schemes at much lower charges than in the past and firms have much more choice of provider than in the past.
“But we need to make sure that this continues as automatic enrolment moves on to smaller firms, and that the constraints on Nest are not a barrier to good consumer outcomes.”
In March, the Work and Pensions Select Committee recommended that the government remove the annual contribution limit and the transfer restrictions on Nest as a matter of urgency.
The government is now seeking evidence and views of employers, industry, consumers and their representatives.
The call for evidence runs from 6 November until 28 January 2013. A summary of responses will be published in spring 2013.
For employers and scheme members, the restrictions on Nest are just perverse; it makes no sense to the employers and the members for one particular pension scheme to be subject to a unique set of restrictions.
If auto-enrolment is to be a success then it is imperative that pensions are made as simple as possible. Lifting the contribution cap and the transfer ban would achieve this simplicity while still ensuring that Nest remains focused on its core role.
Where high contribution rates and relatively high salaries coincide, Nest does not work as a single scheme solution. If an employer wants to pay 10% for staff earning £50,000, they cannot do so in Nest.
However, in our experience, this is not the main reason why most large employers have chosen to continue running their own schemes instead. Some fear that using a scheme set up by the government could make it look like they are just doing what they have to even if they are actually paying far more than the minimum. Others have concluded that, although Nest’s charges are generally competitive, they can get a better deal for their employees if they go elsewhere and avoid having to cross-subsidise the small firms who will participate in Nest.
For some large employers, the restriction on Nest that causes the most problems is actually the ban on transfers out of Nest; this prevents them from using Nest as a nursery scheme and then transferring members’ pots across when they become eligible to join a company scheme with higher contributions after a year or so.
The government is not exactly getting its skates on when it comes to making any changes. It says there are ‘a lot of questions for us to answer’ before it will decide what to do and suggests that the contribution limit could go from 2014 – when there is a big spike in the number of employers who will need to have a scheme in place – or potentially much later. As the DWP recognises, there is a supply bottleneck around the corner: small and medium-sized employers could find few, if any, other providers willing to take them if they do not start looking early. That is more of a problem for those put off by the restrictions on Nest, which has to accept them, but most employers will be happier feeling they have acted early enough to give themselves a choice.
There is something odd about telling an employee who is already saving £4,400 a year into Nest that, if they want to save a bit more, they will have to set up a different pension arrangement off their own back, and about preventing people from consolidating their savings. The question is how much this – rather than merely the obligation to accept even the smallest employers – featured in the European Commission’s thinking when it signed off the loan Nest is getting from the taxpayer on preferential terms. The government has chosen its words carefully on this point. If anything, it might be hinting that it does not think this will be a problem.
We are pleased that the DWP is looking into the possibility of removing the restrictions on Nest. The economic landscape has changed significantly since the auto-enrolment reforms were legislated, so there is a case for reviewing the restrictions if the evidence shows they are acting as a barrier for employers wanting to use Nest or for employees getting value for money. Other requirements on Nest which limit its ability to compete with other providers in the market, such as its public service obligation to serve all employers, will remain in place.
Nest is a key part of the UK savings picture going forward, and we want it to be a success.
We are pleased to see government responding to our call for an earlier review of restrictions on Nest contributions. Nest has the potential to be a one-stop shop for many employers in providing pensions across their workforces but, this will only happen if we make it simpler and drive down costs. Two key ways to do this are to lift the ceiling on contributions and on restrictions on contributions on small pots of pensions savings. Addressing these issues will also give the government greater latitude in dealing with the transfer of small pots when employees change jobs.