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Charges and restrictions stir up a hornet’s nest

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.

In March, the Commons Work and Pensions Select Committee called for the removal of Nest’s restrictions, but the Department for Work and Pensions said restrictions were necessary to comply with EU state-aid rules.

McClymont insists EU rules will not apply once auto-enrolment starts. Interestingly, the government has launched a consultation, so perhaps Labour’s policies are at last having an impact.

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