NEST, the government-backed pension provider, is constrained by unnecessary restrictions. MPs are right to say the the restrictions should go.
The House of Commons Work and Pensions Committee has called for changes to the way that NEST can operate.
NEST was initially created as ‘a pension provider of last resort’, so that every employer and employee should be able to access at least one workplace pension scheme when auto-enrolment began. Read how auto-enrolment works in Workplace pensions: what it means for you.
Creating a ‘last resort’ provider was a good idea, but NEST was also fettered with three restrictions:
1. No employee could contribute more than a certain amount each year – currently £4,400 a year. That contribution limit covers both employer and employee contributions
2. If a worker joins a firm where NEST is the pension provider, he can’t transfer any previous pension to his new NEST pot
3. If a worker leaves his current employer – where he has been contributing to a NEST pension – he can’t transfer his pot to the scheme at his new employer. That scheme might be operated by a rival to NEST.
These restrictions were imposed to ensure that the big private pension companies didn’t face extra competition in the most lucrative parts of the market – people with high salaries or those who have already built up a big pension pot.
But these restrictions mean that it will be harder for NEST to offer a good service and operate profitably. Ros Altmann, the Director General of Saga, has highlighted eleven potential dangers arising from the current set-up. Here are the four most serious:
- Employers who want just one scheme for auto-enrolment can’t use NEST because anyone earning over about £60,000 would breach the £4,400 annual cap.
- Workers can’t make a big one-off contribution to their pot, perhaps if they got a bonus or an inheritance
- Workers close to retirement can’t put more into their pension scheme to make up for inadequate past contributions
- These restrictions will slow down NEST’s growth, and delay its move into profitability. That means that it will take longer for NEST to pay back its Government loan, and it will have to charge higher fees than would otherwise be the case.
In short, lifting the restrictions on NEST will give auto-enrolment the best possible chance to succeed. The question is: will the Government have the guts to face down the big pension companies and make the changes?
More on pensions and auto-enrolment
No, you can’t retire on £50,000
New £144 State Pension: all you need to know
Workplace pensions: how NEST will invest your compulsory pension
Workplace pensions: the alternatives to NEST
FSA investigates annuity mess
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