Pension providers and experts have backed the government’s decision to lift the restrictions on the National Employment Savings Trust (Nest), welcoming the simplification it will bring to the auto-enrolment landscape.
Last week pensions minister Steve Webb announced plans to lift the ban on transfers in and out of Nest and the £4,500 contribution cap it currently operates.
Both restrictions will be lifted at the start of 2017 with a ban on bulk transfers remaining in place until April 2017.
The move follows growing political pressure from the Labour party and the Work and Pensions Committee.
A government consultation on lifting the restrictions was launched in November 2012.
Webb had previously indicated he was keen to remove the restrictions but cautioned that the government could not rush into anything because Nest was hampered by its state funding.
Nest has been funded by a multi-billion pound government loan which, said Webb, would be viewed by the EU as an unfair government subsidy unless the scheme was restricted to a target market of savers with low incomes and small businesses.
Solution to complexity
Jargonfree Benefits chief executive Steve Bee said this argument had not been strong enough to maintain the restrictions, and the move would sweep unnecessary complexity out of the auto-enrolment landscape.
‘I really don’t like the idea of two pension regimes. We should have the same pension tax rules for everyone in the country,’ said Bee.
‘Just because you’re in the Nest pension scheme shouldn’t preclude you from the same rules as everyone else. I don’t think anyone’s ever made a cogent argument for there being different rules for different pension schemes, because it adds complexity.’
Adrian Walker (pictured above), Skandia retirement planning manager, said it was good news for providers as well as employers and their staff as it brought certainty to the market.
‘Steve Webb’s statement gets rid of uncertainty in auto-enrolment, as it allows employers to know what the future is going to be,’ he said.
‘For workplace pensions it makes sense to put Nest on a level playing field, especially in 2017 when the initial auto-enrolment should be complete, because Nest members will be able to consolidate pension savings into Nest if that’s their choice. For smaller employers it’s likely to be the scheme of choice.’
Jamie Jenkins, Standard Life head of workplace strategy, said the government’s decision meant there was one less distraction for providers.
‘Like the consultancy charging debate, we can now put this to one side and focus on the more immediate task of supporting employers through automatic enrolment, within which Nest clearly has a significant role.’
The government has also won plaudits for the timing of the move.
Webb said the 2017 date had been chosen because the £4,500 contribution cap could become problematic after October 2018, when minimum pension contributions will have to rise from 5% to 8%.
The move to allow transfers in and out of Nest is designed to coincide with the start of Webb’s planned reform of the small pots regime, known as ‘pot-follows-member’, under which employees take small pension pots with them when they move employers.
LV= head of pensions Ray Chinn (pictured above) said the 2017 deadline would allow firms to get to grips with auto-enrolment before the changes took effect.
‘By 2017 the majority of people will have been involved in auto-enrolment and we’ll be able to see the effect of removing the restrictions more clearly,’ he said. ‘It will give Nest time to make its mark on auto-enrolment, making it more established in that market.’
Hargreaves Lansdown head of pensions research Tom McPhail (pictured above) said he would have liked the restrictions lifted sooner, but acknowledged that this could have resulted in opposition from private sector providers.
‘Sooner would have been nice, but it appears to be a done deal now,’ he said. ‘I don’t think the insurers will fight it, whereas if it had been done immediately, rather than now, it might have been more troublesome for the government. So it’s a pretty pragmatic solution.’
Despite the general good will towards an unshackled Nest, as McPhail alluded not every provider was happy with the government’s plans.
Steven Cameron (pictured above), Aegon UK head of regulatory strategy, said Nest was set up to cater for low-paid workers and must avoid drifting from this mandate despite being able to take on larger pension pots once its restrictions were lifted.
‘This changes the workplace pensions landscape in a major way, but not just for existing pension providers and advisers,’ he said. ‘Nest itself will need to review its proposition to make sure it’s appropriate for this new, wider potential customer base, just as existing providers are required to.’
Jamie Clark, Scottish Life business development manager, agreed there was a danger Nest would be used by employees who did not fit its original mandate and for whom it might not be suitable.
‘The danger may then be that Nest might not be suitable for the employer or individual any more. The extent of this we won’t know for a couple of years,’ he said. ‘It could lead to bad member outcomes and political risk: people coming back and saying the funds are bad, so there could be potential political fallout for auto-enrolment that could lead to increasing opt-outs.’
Calls to remove Nest bias
Cameron said the government should avoid promoting Nest above other schemes beyond 2017.
‘The government and the Pensions Regulator (TPR) now need to examine how they communicate workplace pension reforms, including solutions other than Nest, to employers and make sure they don’t overly influence their decision in selecting a scheme,’ he said.
‘The key is to remove any bias towards Nest sooner rather than later.’
Morten Nilsson (pictured above), chief executive of auto-enrolment provider NOW Pensions, agreed that Nest should no longer receive preferential marketing in auto-enrolment literature following the restrictions being lifted.
‘The regulator still refers to Nest in its letters, but what if they referred to a list of approved providers? There is fairness to maintain and to make sure people get the best deal’ he said.