There is excellent news in the report from the DWP Select Committee today on pensions. They say the government should lift the restrictions on NEST that ban transfers and impose an upper limit on how much anyone can contribute each year. No other pension scheme suffers from such restrictions, and the report shows all party support for the position long argued by the TUC, and our consumer group allies, that they were unfair.
The restrictions were imposed by the previous Labour government as a direct result of pensions industry lobbying. There were two public reasons for them:
- NEST should concentrate on the needs of low and medium income savers. If they could take savings from the better-off they would repeat the failure of the pensions industry to serve this sector of the workforce.
- The pensions industry would face unfair competition because NEST was getting state support (through soft loans) to get going.
Neither argument was right then. They are even more unsustainable today.
NEST is now established itself as a pension provider form low to medium earners. Its approach to investment, scheme design and communication have all won wide praise. Even if the first reason was ever justified, it has now done its work.
NEST rightly gets modest state support because Parliament has given it a public service obligation to service any employer under auto-enrolment, however small and however disorganised. That is a burden shared by no other pension scheme. The truth has always been that some commercial pension providers were simply worried about competition from a low-charging, not for profit, trust governed scheme.
Ministers at the time wanted to maintain a consensus, and no doubt thought that the restrictions were a necessary concession to an industry that was much more highly regarded pre-crash. That argument had some merit, but that does not mean that this concession was necessary or right.
In any case, even if you view the restrictions as part of a historic compromise, other factors have changed significantly since then.
Both this and the previous government have lengthened the phasing and staging process. This government has introduced a further thee month waiting period before employers have to auto-enrol a new employee and raised the pay threshold for auto-enrolment.
None of these are good for NEST as they all reduce the likely flow of contributions. Lifting restrictions now could thus be seen as no more than restoring the balance of the original compromise.
These restrictions undoubtedly limit NEST. They mean that it cannot be used as a sole pension provider by any employer with better paid staff that might want to contribute more than the upper limit (and that’s most). It also stops employers moving an existing pension scheme into NEST through a transfer even if the employer thinks that NEST is a better option for their staff.
Unsurprisingly the pensions industry wants to keep the restrictions. Indeed sections are on the offensive against NEST. With a growing awareness that the for-profit defined contribution contract based model that once served minority niches in pension provision is not necessarily the best model for an auto-enrolment world with millions of savers, they rightly feel under some pressure. Whether intransigence is their best response is however open to doubt.
It is more disappointing to see the CBI rejecting the call for the restrictions to go now. Many of their small to medium size members view the restrictions as an unnecessary regulatory burden as it stops them choosing NEST as a single pension scheme for all their staff.
While it is right to welcome the CBI ‘s rejection of small business lobbying for a small firm exemption from pensions auto-enrolment, on this issue they have chosen to side with the vested interests of their big pension company members rather than the interests of employers as a whole.
Contrast with Steve Radley, the Director of Policy at EEF, the manufacturers’ organisation, who said:
“We welcome the Committees endorsement of NEST as the way forward for firms of all sizes. NEST is the right model to encourage and help encourage individuals to save for their retirement and offers employers a simple way to contribute to this. However, employers are concerned with the complexity caused by the cap on contributions and constraints associated with the ban on transfers. These are issues that need to be addressed urgently rather than waiting for the review in 2017.”
Steve Webb is clearly a strong supporter of auto-enrolment and NEST. At an event I was at earlier this week he revealed that in less than a month he will become the longest serving pensions minister for 15 years – and his expertise is obvious.
Governments are expected to respond constructively to select committee reports. This one certainly provides the opportunity for the minister to do the right thing.
Disclosure: I’m a member trustee of NEST, though these are my views – and I held them long before I was appointed a trustee.