NEST – free from restrictions but not just yet

ImageSince its creation, the National Employment Savings Trust has faced restrictions as the government-backed provider to make it focus on its target market: the low to moderate earners, small employers and employers with a high turnover of staff who previously did not have access to good value pensions.

Firstly, the annual contribution limit of £4,400 (in 2012/2013 tax year). Secondly, the ban on transfers into and out of NEST. Thirdly, NEST is restricted by its public service obligation to accept everyone automatically-enrolled, a low-cost objective to offer good value and a ban on offering other products such as life insurance to help improve its margins.

The problem is now the restrictions on contributions and transfers have increasingly come under attack for limiting NEST’s ability to compete in an expanded market against other low-cost providers including NOW Pensions and B&CE together with insurance companies who are willing and able to offer large businesses chunky discounts.

In March 2012, the Work and Pensions select committee called for the restrictions on the NEST to be lifted as a “matter of urgency” or risk the scheme failing to protect against the market gap it was designed to address. The committee argued the contribution cap would stop employers with any high-paid workers from using the scheme, while the ban on transfers added needless complexity for businesses hoping to use a single scheme for auto-enrolment and members wishing to consolidate pension pots.

At the time the DWP said it might be “unlawful” to boost business into NEST and maintained it would wait to look again at the restrictions until the established review date in 2017. This is now the matter of legal and increasingly political argument.

The consultation

But, in November 2012 the government signalled a rethink. The Department for Work and Pensions launched a call for evidence on removing the cap and the ban on transfers. The DWP laid out eight different options and asked for feedback from employers, industry, consumers and their representatives. The link is: http://www.dwp.gov.uk/newsroom/press-releases/2012/nov-2012/dwp114-12.shtml

The government is seeking views as to whether the two restrictions are influencing employers’ choice of automatic enrolment scheme in a way that was not intended. From this, the government will also examine the extent to which commercial providers are able to supply low-cost provision to a very diverse range of employers as automatic enrolment gathers speed and how the balance between employer choice and consumer interests shifts as the Auto Enrolment staging dates begin to capture smaller employers.

The Pensions minister Steve Webb has raised concerns that the restrictions on NEST could leave mid-sized employers, with staging dates at the end of 2013 and into 2014, with little choice for an auto-enrolment provider. Webb has said: “We don’t think we have a problem on day one, we think the big firms that are auto-enrolling now are enrolling into generally good low-cost schemes. The question will be further down the market: if you are a medium size firm will you have choice?”

CBC’s reaction

CBC largely echoes Webb’s concern over a 2014 bottleneck, where the restrictions on NEST prevent employers from choosing the scheme for all their staff. CBC believes that the restrictions should be removed since they act as a barrier to employers making auto-enrolment choices decisions.

NEST has undoubtedly lost out on major corporate business because of the restrictions.  A number of employers have chosen not to look in detail at NEST because of the restrictions which are in place.  For some larger employers, the restriction on NEST that causes the most problems is the ban on transfers out of NEST. This prevents them from using NEST as a nursery scheme and then transferring members’ pots across when they become eligible to join a company scheme with higher contributions at a later date.

NEST has announced a number of contracts with high-profile employers, such as McDonalds, BT and the BBC. However, the public service obligation which NEST has means it takes on business the rest of the market would cross the road to avoid. To enable NEST to have the necessary economies of scale it needs to be able to attract better quality business to balance out the more difficult stuff.

Nest steps

The DWP consultation runs until 28 January 2013, with responses to be published in the Spring of 2013 – let’s hope they keep to time.

Update July 2013

Steve Webb has now announced in Parliamentary written statement that the government has responded to the DWP consultation about the restrictions on the National Employment Savings Trust (NEST) to remove these in order to allow it to “focus on its target group without any distraction”.

Webb went on to say that ‘’With over 250,000 members already, it is clear that NEST is a success. Targeting low to moderate earners that the market has traditionally forgotten.With its special focus on those workers with lower earnings, NEST will be a key part of the solution as it has thought hard about its design; it has aimed its research, communications, use of language, investment and decumulation strategies at its target market. o make sure we achieve our aim of getting people saving, we have decided that NEST must continue to focus on its target group without any distractions. That is why I am not making any changes until 2017, when automatic enrolment is fully rolled-out. At this point I will lift the contribution limit so that NEST remains a force for good in the marketplace, driving up standards and best practice.’’

“As huge numbers of employers gear-up to start to enrol their workers, we need NEST to focus on getting these people in to pension saving.”

Earlier in 2013 the Work and Pensions Select Committee called for the restrictions to be lifted “as a matter of urgency” However, the government said it decided to stick with the 2017 date.

NEST and CBC welcomed the decision and said it now provided certainty for employers and members. Managing director of product and operations Helen Dean said: “Members and employers will be able to use NEST as they would any other pension, with no specific restrictions on the amount they can contribute or the ability to transfer in and out.

“We welcome the certainty this announcement brings for employers and members. This means the restrictions will be lifted before minimum contributions rise to 5 per cent in 2017. NEST continues to focus on our target market as we always have done.”

The current restrictions on NEST include an annual contribution cap of approximately £4,500 and a ban on transfers in and out of the scheme. These will be lifted from April 2017. It’s just a shame it’s not sooner