The Government's latest proposals for introduction of compulsory automatic enrolment of all workers into a workplace pension scheme are an improvement on the previous proposals enshrined in current legislation, but we have serious reservations about the way auto-enrolment will work and about the introduction of the NEST (National Employment Savings Trust) scheme.
1. 2% up front charge is very damaging and will hit the over 50's particularly hard, as well as those not able to contribute over many years
We believe that the decision to levy an initial charge of 2% on NEST pension contributions is unwise and unfair. Government's intention to recoup the set-up costs will unfairly penalise those who contribute in the early years and also damage pension outcomes for many. Although we recognise that a 0.3% annual charge is low and therefore could be of benefit to NEST savers in the long run, the initial charge could more than offset the benefits of this low annual charge for workers who are not in the NEST scheme for long. For example, workers who are already in their fifties will not have many years in which to save in the NEST scheme, so their savings will be badly impacted by the 2% initial charge. It is essential that the Government issues proper information to explain the problems of this charging structure and help workers understand.
2. Many could end up with worse pensions as employers level down to the NEST minimum
We are concerned that many employers could take the opportunity to cut back their contributions to existing pension schemes towards the minimum level. From 2012, employers will have to contribute just 1%, then rising to 2% and then to 3% of earnings by 2017. In fact, employers currently running staff pension schemes are actually contributing an average of around 6% of salary at the moment. This means that employers could decide to cut their contributions significantly, leaving workers currently in an employer's scheme with lower pensions in future as a result of the low minimum suggested by NEST. This levelling down is a significant threat to future pension provision, although the fact that there is a maximum £3,600 annual contribution limit should help to offset this risk to some extent. Nevertheless, it is vital for Government to monitor the progress of employer contribution rates over time.
3. Will people have proper risk warnings before being enrolled?
We are concerned that pensions may not be suitable for many of those automatically enrolled. Some low income workers, especially those with large debts or who are very young, may not be best advised saving in a pension, but who will warn them of those risks.
4. NEST pensions likely to be very low
We are concerned that workers may believe that NEST will offer them a good pension, whereas the low levels of contributions and the risks of rising annuity costs will mean that the ultimate pension received could be very modest. Workers need to know the real risks and costs of pensions, otherwise they may be lulled into a false sense of security by NEST. The very low levels of contributions are not sufficient for most workers to receive much pension and they need to be made aware of this.
5. Money could be locked in for decades - maybe NEST should be an ISA as well as pension
We are concerned that NEST pensions are not necessarily suitable for younger, lower earners in particular, nor for workers who have large debts. These workers might be better off saving in an ISA, rather than a pension, or using the money they set aside to pay back debt, rather than locking it away for many years or decades into a pension. We would prefer to see the Government introduce a national Savings scheme, not just a national Pensions scheme, so that workers are automatically enrolled into a savings vehicle, and can then choose between perhaps a 5 year fixed term ISA or a pension that is locked away till older age. We believe this would encourage more people to save, since the structure of the pensions vehicle is very daunting for many younger workers. They may know they should be saving, but are frightened of the pension contribution money being so inaccessible, even if needed in emergency. We call on the Government to improve the flexibility of the Pension, so that workers can get the money back if really needed.
6. Small pots of money could have to be tracked for decades
We are concerned that many workers could end up contributing for a short time into NEST and then maybe even move abroad but they will be unable to withdraw their money and it will have to be tracked for many decades until they reach their fifties. This entails large administration costs and will also not be very fair on workers who contributed to NEST without realising their circumstances would change. This again suggests that the NEST pension should be made more flexible and allow withdrawals if needed.