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Charges and restrictions stir up a hornet’s nest

by Ros Altmann on Nov 22, 2012 at 09:50

Charges and restrictions stir up a hornet’s nest

Labour shadow pensions minister Gregg McClymont has been clarifying his party’s pension priorities. Top of his list are reducing charges and removing restrictions on the National Employment Savings Trust (Nest).

The last Labour government was, after all, the architect of the stakeholder regime, which introduced a maximum 1% charge. Its big idea for revitalising long-term savings was to design cheap, simple products that offered standardised charges and access. 

Stakeholder scenario

As a precursor to auto-enrolment, Labour legislated that all employers with more than five employees must provide a pension scheme, with many companies allocating stakeholder pensions for their workforce. But providers could not sell products profitably at the 1% level, so stakeholder charge caps rose to 1.5%. 

The Opposition is now calling for annual statements showing a single transparent figure for all costs and fees. There is general consensus that high charges damage long-term performance, and Liberal Democrat pensions minister Steve Webb rightly wants charges reduced. With return expectations of 4% to 5%, a 1.5% to 2% charge can remove much of the expected return.

Nest charges

With a 1.8% upfront fee on top of 0.3% annual charges, Nest is hardly low cost. This 1.8% contribution charge is meant to be temporary, lasting only until the £170 million government set-up loan has been repaid. 

The more assets Nest attracts, the sooner it can repay this loan and become a truly low-cost provider. Therefore Labour’s argument to Webb is: help Nest attract assets.

This leads to Labour’s second policy priority: removal of Nest restrictions that ban transfers in from other schemes, and cap each member’s annual contributions. 

McClymont is rightly concerned that Nest is trying to compete with its hands tied behind its back, while most employers will want just one pension arrangement. Nest cannot be that provider because it cannot accept auto-enrolled, high-paid staff, nor take pension entitlements from existing schemes. These restrictions may leave it serving mainly employers that no other providers want, including those with low-paid workers who pay in small sums but are expensive to administer.

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2 comments so far. Why not have your say?

Hugh Jars

Nov 22, 2012 at 13:20

Politicians are rarely Financially Savvy, hence the reason they are politicians.

If they were clever enough to develop new strategies /products, call it what you like, they would be in a real-world business, where your 'Numbers must stack up'' or you last 5 minutes.

they are fortunate in that they are basically allowed to make up the rules as they go along,

Allowing Politicians to play such a hands on role in such a fundamentally important part of the mass population's finances is going to end in tears....

They were warned, but,

The train has already set-off, is already gaining towards full speed, -crash is already happening,

Would you logically buy into a Tracker Fund costing 2.1% pa???, when there are many index funds (you can choose to match your own risk tolerance) available at approximately 0.3% TER per annum...through Vanguard ,HSBC etc etc....

Advising someone to invest in Nest is tantamount to mis-selling...... And you can see it in a few years......Employers being chased by WeSueAnyone.com....for taking the Governments advice, and simply using NEST, when vastly superior, vastly cheaper deals were available....

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Nov 23, 2012 at 09:09

NEST was designed to take the employees noone else wanted.

The usual insurers will cater for 50% of the AE business, Now and People's pension will take a bit more, though even they are realising they'll have to turn away the dregs. NEST was given the subsidies and the mandate to take the rest.

Ok, so it will complicate things slightly for the Employer having more than one arrangement, but AE was never going to be easy.

NEST can't be redesigned to compete - it's a no frills default option

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