Removing Restrictions on NEST would be great for auto-enrolment and taxpayers

NEST currently trying to compete with both hands tied behind its back

1.8% upfront charge needs to be re-thought for short-stayers or older workers

by Dr. Ros Altmann

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Consultation on removing NEST restrictions is welcome: The DWP is today consulting on removing the current restrictions on NEST. 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.

Most employers will want only one pension scheme, but 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 NEST and any high paid staff cannot be auto-enrolled into NEST 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 the restrictions on NEST would have significant benefits.

• 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.
• 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 &pound170m 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 NEST 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, this 1.8% charge 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 NEST 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.
• Market failure for small pots can be addressed by NEST taking small transfers: 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.
• NEST cannot just manage the pensions nobody else wants: It is important that NEST restrictions are reconsidered, in order the 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 NEST 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.