♦ NEST can't thrive if it just picks up the business private providers don't want
♦ State aid for NEST to reach £379m if restrictions remain - waste of taxpayers money
Restrictions must be removed now: The Work and Pensions Select committee today repeats its calls for the Government to urgently lift NEST restrictions. It is absolutely vital that these restrictions are removed as soon as possible. The aim of the restrictions was supposedly to ensure NEST focussed on its remit to ensure lower paid workers would always be served, even if they are unprofitable to existing providers, but the emphasis on this remit has resulted in NEST being locked out of other profitable business that it obviously needs if it is to be viable.
Taxpayers and workers lose out if NEST must compete with hands tied: By preventing NEST from properly competing for auto-enrolment pension assets, taxpayers are likely to lose out by having to subsidise NEST for far longer and workers are likely to lose out because so many will end up in employer schemes which are less attractive for them than NEST.
Private providers want to cherry-pick most profitable business: The private pensions industry was very successful in lobbying to prevent NEST from competing too hard for the most profitable pensions business. The restrictions that were imposed to protect private providers have resulted in NEST being unable to compete properly in the market.
NEST must attract profitable business too: The original aim of NEST was to ensure that there would be a 'pension provider of last resort' who would have to service the most unprofitable parts of the pension savings market (low paid, transient workers who paid very little into their pension scheme under auto-enrolment and who private providers did not want to service as they would not be profitable). However, it is not reasonable to try to force NEST to have to focus only on the unprofitable parts of the pensions landscape. NEST has to be able to attract profitable business too if it is to thrive.
Restrictions should be lifted now to protect auto-enrolment: As more firms start to auto-enrol workers, there is a danger that some providers may fail either through mis-management or fraud and NEST would need to be ready to take in stranded assets and new auto-enrolment contributions quickly in such an emergency. This is impossible with the current ban on transfers and the Government should lift the restrictions now, just in case there is such a problem rather than waiting to see if it happens.
Removing restrictions is urgent as employer inertia means NEST won't easily attract business once auto-enrolment has been established: The longer the restrictions remain, the less business NEST will attract, because once employers have already chosen a scheme for their auto-enrolment duties, they will be less likely to want to move to NEST later.
Taxpayers will have to spend £379m if NEST can't attract more assets: Taxpayers have funded the initial set-up of NEST but the idea is that it should become profitable enough to repay the taxpayer loans. The Work and Pensions Committee points out that if NEST cannot take in enough assets, the cost of state aid to NEST is likely to be at least £379million, whereas that cost can be reduced significantly if NEST can attract more assets. Given the current fiscal constraints, the taxpayer clearly has an interest in ensuring its costs are minimised.
Dangers of NEST £4,400pa contribution cap:
1. 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
2. Workers would not be able to add a top up contribution to their pension one year, perhaps if they get a bonus or an inheritance
3. Workers close to retirement could not put more into their pension scheme to make up for inadequate past contributions
4. NEST profitability will be hampered as it can't serve the most profitable higher paid workers, thus hampering its ability to repay the Government loan and remove the 1.8% upfront charge
5. Adds to complexity for NEST as they have to check contributions each year
6. Workers may be misled into believing £4,400pa is the 'approved' appropriate level they need to save whereas this will not always be enough to give a decent pension
Dangers of ban on transfers in and out:
1. Stops NEST building up more assets to help it become more profitable and benefit from economies of scale
2. Employers using NEST would have to keep a legacy scheme in place, rather than being able to move to having just one scheme in future
3. Government's aim of having people build up pension rights in one place cannot be fulfilled with NEST unless it can accept transfers
4. If NEST isn't able to attract enough assets it will take much longer to repay the Government loan
5. Government estimates it could save £179million in state aid if NEST achieves high membership, but the low membership resulting from restrictions will lead to a £379million burden on taxpayers
If we really want NEST to survive and thrive, these restrictions must be removed.
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