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Five reasons to lift restrictions on Nest
by Ros Altmann on Nov 07, 2012 at 13:40
The Department for Work and Pensions has launched a consultation on lifting restrictions on contribution levels and transfers into and out of the National Employment Savings Trust. Independent pensions expert Ros Altmann explains the benefits of lifting the restrictions.
A welcome discussion
A consultation on removing National Employment Saving Trust (Nest) restrictions is welcome. The Department for Work and Pensions has started to talk about removing the current restrictions. This is great news. This would allow the taxpayer-funded national pension scheme to accept transfers from other pensions and would remove the upper limit on contributions.
A need for flexibility
Most employers will want only one pension scheme, but at the moment this can't be Nest.
Employers with existing pension schemes cannot use Nest for all their staff pensions and many will not want to have to bother with more than one scheme.
Nest means current pension accruals can't be put into it and any high paid staff cannot be auto-enrolled into the scheme if their minimum contributions exceed the maximum limit.
Nest is being forced to compete with two hands tied behind its back. I have long argued that these restrictions mean Nest will struggle to succeed. Removing these restrictions would have significant benefits...
All in one place
Firms will prefer to use just one scheme. Employers would be able to use only Nest for all their pension arrangements. Many employers will want the simplicity of having just one scheme for all its employees, which would rule Nest out for large numbers of firms.
Repay the government loan
Taxpayer loans will be recouped more quickly. The taxpayer has committed to supporting the set-up of Nest for the initial period, but this money must be repaid as soon as practicable. It has already spent over £170m in setting up Nest. The more assets Nest manages to attract, the sooner it can repay the taxpayer loans. It is therefore in all our interests that it becomes more competitive as soon as possible.
Nest upfront 1.8% contribution charge might be abandoned to give members better value more quickly if more assets come in. In order to repay the taxpayer loans, Nest has felt forced to levy an initial 1.8% upfront charge, which renders this supposed-to-be low cost scheme relatively expensive. This charge is a self-inflicted problem for Nest, but results from the way it has been set up. Indeed, it means the first year of contributions could face charges of more than 2%. This is hardly a low cost scheme. If Nest was able to count on more assets flowing in at the beginning, it may be able to alter its charging structure to become more competitive. Anyone who does not stay in the scheme for long will end up paying much higher charges than the 0.5% target amount.
Nest made it clear that the 1.8% initial charge was a result of having to repay the loan and once it is repaid, the charging structure will change.
Cleaning up the small pots
There is likely to be a market failure relating to small pension pots which result from workers who only stay a short time with their employers and then move on to another firm. Existing providers will find it uneconomic to manage these small sums, so the member will have to move their assets, but a new provider may be equally reluctant to take on the small amounts of money. If Nest could sweep up all the small pots, as a default provider, this problem can be managed.
Looking after the unwanted pensions
Nest cannot just manage the pensions nobody else wants. It is important that the restrictions are reconsidered, in order to give Nest a better chance of eventual financial survival. Nest needs large pools of assets to help cover its costs.
It is not financially sustainable for it to only be there to take the pension contributions that nobody else wants. It has a public service obligation to serve all employers who want to find an auto-enrolment scheme, but if it ends up only having the worst employers, with mostly low-paid short-stayers, it will have insufficient assets to function with the necessary economies of scale and the administration costs will make it uneconomic as a pension scheme.
...If we really want Nest to survive and thrive, these restrictions need to be removed.
Ros Altmann is an independent pensions expert.