Thursday 15 March 2012

Writing is on the wall for NEST – employers will steer clear of it if contribution cap and transfer ban remain and taxpayer costs may never be recouped


And without radical State pension reform, auto-enrolment could end in massive mis-selling claims by older low earners who find pension savings were unsuitable for them

NEST contribution cap and transfer ban make it unattractive to employers  who want only one scheme:  The writing is clearly on the wall for NEST.  If the current restrictions which cap contributions at around £4,200 a year per employee is not lifted, any employers who want to have to run only one pension scheme will steer clear of using NEST as their auto-enrolment pension scheme of choice.  Employers will often find it much more attractive to use only one pension scheme for all their workforce, but that one scheme cannot be NEST, due to the contribution cap it carries. Higher paid workers could not join NEST under current terms. In addition, banning workers from transferring other pensions into NEST will prevent them from holding all their pension savings in one place, to avoid unnecessary complexity and charges.  As NEST cannot accept transfers from other schemes, workers may also not find it attractive.  These two issues mean NEST take-up is likely to be far lower than forecast, leaving taxpayers with a bill for establishing a scheme that many employers and workers would not wish to use.

State pension reform is urgently required to prevent an auto-enrolment disaster.  At the moment, we are ploughing ahead with auto-enrolment, enticing low-paid workers into company pension schemes and deducting money from their pay, before we have reformed the state pension system.  This is the wrong way round!  Because of the way state pensions work, the state system makes private pensions an unsuitable investment for many low-paid workers – especially the older ones.  If the state pension continues to means-test nearly half of future pensioners, there is a significant risk that hundreds of thousands of people will find their pension contributions deliver little or no extra retirement income for them.  This means they should have opted out, but they would have been unaware of the risks and the Government needs to urgently deal with this issue.

Auto-enrolment for older workers should be reconsidered, or proper risk warnings issued.  The decision to auto-enrol workers in their 50s and 60s is a dangerous one, that needs to be reconsidered.  People in their later years who are on low incomes are unlikely to benefit from big pay rises before retirement so they will stay on low incomes and are most likely to end up on means-tested benefits in later life.  They are also the ones with least time to accrue a good pension fund and, therefore, are most at risk of receiving very little pension income from their auto-enrolment scheme.  Some may find they have wasted all their money.  Others could find that a small extra contribution has led to them losing the chance to take all their pension fund as a cash lump sum, but there are no risk warnings or advice processes built in to this system.  It is these older workers who will be the first to retire in the earlier days of the whole auto-enrolment process and they are the ones most likely to be disappointed.  It is easy to envisage many headlines with workers claiming they were not warned of the risks, their pensions have disappointed and giving the industry yet more negative press.  It is much safer to only auto-enrol those below 50, which would give the process time to ‘bed in’ before people retire and also give them more time to build up meaningful funds.  The older workers could choose to join their company scheme, but that would be up to them and they could not then criticise the Government for enrolling them and failing to warn or ensure they were properly warned of the dangers.

NEST could end up with few members and only those nobody else wants.  If employers are unlikely to select NEST out of choice, the likelihood is that only those companies which cannot find a private provider to help them will join NEST, and these are likely to be the employers who are least attractive to the private sector – and therefore least profitable.  Those with transient workforce, very low paid, or employers who have no financial expertise are least attractive to pension providers but NEST will have to take them on, while the rest of the industry could concentrate on the more profitable companies.

NEST cost structure may also put firms off – and could hinder attractiveness of NEST.  The 1.8% up-front contribution charge in NEST also makes it seem unattractive relative to other schemes.  The low cost alternatives to NEST offer more attractive terms now, especially for older workers who have far less time to recoup the initial charge.  The reason for the 1.8% fee is that NEST needs to repay taxpayers for its original loan that covered the costs of establishing NEST in the first place.  This is meant to be a ‘temporary’ charge, until the taxpayer is repaid, but the fewer firms that use NEST, the longer it will take for the loan to be repaid and the longer NEST may remain unattractive, which sets up a vicious circle.

Transparency of charges long overdue.  It is certainly true, as the Work and Pensions Committee rightly says, that workers find it very difficult to compare charges for pension schemes.  A standard wording and comparison table would be a great idea, but seems beyond the ability of the industry to deliver so far.  Even the currently quoted, so-called ‘Total Expense Ratio’ or ‘TER’, does not actually include all the costs – it does not include transaction charges, for example.  In the current low interest rate environment, it is even more important than ever that customers understand what they will have to pay each year for their pension fund management.


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