Room for manoeuvre in government policy on NEST and auto-enrolment?
On Friday the government published its response to the Work and Pensions Select Committee’s report on automatic enrolment in workplace pensions. To a large extent the government’s response held steady to existing policies, although it must be said, the Committee’s original report was itself largely supportive of how policy has developed in this area. So the post-Turner
Commission consensus remains intact. The response did, however, give rise to one or two comments from the government that suggest reforms – on issues like early access, charges and NEST restrictions – might not be too far off.
On early access, the Committee had asked the government to consider allowing individuals to withdraw pensions saving early – which is generally prohibited – in order to buy their first home. In its response, despite reiterating evidence that early access could undermine rather than encourage pension saving, the government nevertheless recognised that the inflexible nature of pension saving could encourage some people to ‘opt out’ after automatic enrolment, and therefore suggested that the early access issue would be revisited.
They did not, however, refer explicitly to the possibility that early access should be allowed only in order to enable people to get onto the housing ladder, nor to alternative early access proposals such as allowing people aged 30 or under to build up pension saving in a more liquid format, to ease the tortuous transition to adulthood for today’s young people.
On charges, the Committee noted concern that high charges will eat into the pension pots built up by newly-enrolled individuals. There was little by way of detail – the government is clearly hoping that self-regulation on most charges will do the trick – but strong words nonetheless:
The government has made clear that charges should not be excessive in relation to the services being provided.It will monitor charges throughout automatic enrolment to ensure that disproportionately high charges do not pose a risk to good member outcomes. If this proves to be the case, the government will take action.
And on NEST restrictions, perhaps the most contentious issue, the media has generally reported that the government has rejected the Committee’s demands to ease restrictions on a) the cap on contributions into NEST, and b) the ban on transfers into NEST. However, the government’s response on this issue is worth reproducing in full:
The government welcomes the Committee’s consideration of the NEST restrictions. NEST is one of many schemes which employers can choose to use to fulfil their employer duties. Its purpose is to fill a supply gap in the pensions market by offering a simple, low-cost pension scheme to individuals on low to moderate earnings and employers that the existing pensions industry does not serve well. NEST is an impressive product and it is important that employers consider fully whether it is an appropriate scheme for their workers. If there are barriers, or perceived barriers, to employers choosing NEST, where it is appropriate for them to do so, the government needs to consider carefully what can be done to remove them. However, the evidence that the NEST restrictions are acting as a barrier is not unequivocal and the government is conscious that the restrictions were designed to ensure that NEST’s focus remained on its target market. In particular, the Committee is right to raise the issue of state aid. It would not be lawful for the government to remove the restrictions simply to increase take up of NEST—there would need to be evidence that such action is required to address market failure. The government will reflect further on the issues raised by the Committee.
Policy may, it seems, be in a state of flux (although whether the government is prepared to introduce reforms before the planned review in 2017 remains to be seen). As the government points out, NEST restrictions were introduced largely as a result of pressure from providers fearing that an unrestricted NEST would out-compete their products. While the CBI remains opposed to the easing of restrictions, the National Association of Pension Funds has in fact accepted that there is a strong case for easing restrictions, given changes to the economic landscape and the entry into the market of direct competitors to NEST.