Good news – NEST restrictions to be removed – Bad news – not till 2017!
Government bows to pressure from pensions industry lobby wanting to cherry-pick best business
Taxpayer loan can’t be repaid if NEST doesn’t thrive
NEST should now consider changing charging structure to flat fee
by Dr. Ros Altmann
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NEST restrictions need to be removed now, not 2017: The Government seems to have bowed to industry pressure and decided it will remove the current NEST restrictions, but disappointingly not until 2017. The restrictions were imposed to protect private providers, but have resulted in NEST being unable to compete properly in the market.
Private providers want to cherry-pick most profitable business: The private pensions industry has already managed to prevent NEST from winning some of the most profitable pensions business. The original aim of NEST was to ensure that there would be a ‘pension provider of last resort’ who would have to service the most unattractive parts of the pension savings market (low paid, transient workers who paid very little into their pension scheme under auto-enrolment) whom private providers did not want to service as they would not be profitable.
Government fearful of EU court case perhaps: The pensions industry had also threatened to challenge any decision to lift the restrictions in the EU courts claiming NEST had an unfair competitive advantage due to receiving state aid. There is scant evidence of NEST competing unfairly so far and the longer the restrictions remain, the more it loses out, but perhaps the Government was fearful of being challenged.
By 2017 most attractive employer business will have chosen other schemes: The longer the restrictions remain, the less business NEST will attract, because once employers have already chosen a scheme for their auto-enrolment duties, they will be less likely to want to move to NEST later.
Taxpayers could lose out by nearly £400m if NEST must compete with hands tied: By preventing NEST from properly competing for auto-enrolment pension assets, taxpayers are likely to lose out by having to subsidise NEST for much longer. Taxpayers have funded the initial set-up of NEST but it aims to become profitable enough to repay these taxpayer loans. According to the Work and Pensions Select Committee, if NEST cannot take in enough assets, the cost of state aid to NEST is likely to be at least £379million, whereas that cost can be reduced significantly if NEST can attract more assets. Why should taxpayers be implicitly subsidising pension industry profits?
Why the restrictions are so damaging to NEST:
- If employers want just one scheme, it can’t be NEST: The £4,400 contribution cap means employers who want just one scheme for auto-enrolment cannot use NEST because anyone earning over about £60,000 would breach the £4,400 annual cap and it could not transfer past pension accruals to NEST so it would need to keep an existing scheme ongoing.
- Pot-follows member cannot work until NEST restrictions lifted: Government’s aim of having people build up pension rights in one place cannot be fulfilled with NEST unless it can accept transfers.
- Workers cannot pay in one-off contributions if they get a bonus or inheritance: Workers close to retirement cannot put more into their pension scheme to make up for inadequate past contributions. Workers cannot add a top up contribution to their pension one year, perhaps if they get a bonus or an inheritance.
- Damages NEST profitability and taxpayer loan repayment: If NEST cannot serve the more profitable higher paid workers, its profitability and ability to repay the Government loan are hampered. It will prevent NEST building up more assets to benefit from economies of scale.
- Higher administration costs: Cost of administering NEST scheme is higher due to complexity of having to check contributions each year to see if they exceed the cap.
Can’t remove 1.8% upfront charge: NEST’s current charging structure means that it looks a rather expensive scheme and the 1.8% upfront charge is especially problematic for older workers who are automatically enrolled close to retirement and will not have time to recoup the upfront cost over many years.
The Government has, sadly, missed an opportunity to put NEST on a sounder footing more quickly. It should urgently look to change its charging structure straight away to help improve the attractiveness of its offering. By the time NEST’s restrictions are lifted in 2017, much of the most attractive auto-enrolment business will be over and NEST will struggle to attract employers who have already chosen an alternative scheme that is able to meet their needs without being restricted. This is a major positive for pension providers – let’s hope they prove they can offer great value pension schemes for employers.