• Annual pension contribution limits will drive smaller employers away from NEST
• Pension transfer restrictions inconsistent with pot follows member system
Removing the current annual contribution and pension transfer restrictions on the national pensions scheme, National Employment Savings Trust (NEST), is critical to the accessibility of the scheme for UK employers and employees, said Mercer, in its response to the Department for Work and Pensions (DWP) consultation on NEST constraints.
The DWP consultation examines the impact of the annual contribution limit and the restrictions on transfers imposed on NEST. The rules were introduced to protect consumer interests by focusing NEST on its target market. Under the current rules, NEST has an annual contribution limit of £4,400 for each member in the tax year 2012/2013 and this is adjusted annually in line with changes in average earnings. Most pension transfers are also banned, whether the pension is being transferred into or out of NEST.
Dina McDonald, Principal at Mercer commented, “Mercer supports the removal of NEST restrictions before the end of the staging period in February 2018. Although the restrictions do not currently appear to be driving the selection of the auto-enrolment scheme for most employers staging over the next 12 months, this is because larger employers are more likely to accept the need for more than one pensions vehicle, each targeting the needs of specific segments of their workforce.
Fixed maximum annual contributions will become more of an issue as growing numbers of smaller employers are required to enroll their workforce into pension schemes. These employers, who are NEST’s main target market, will often have one or two key workers whose earnings are such that they could be impacted by the annual contribution maximum. This may have the knock-on effect of driving smaller employers and their employees away from NEST and towards commercial master trusts which do not have these restrictions.”
Mrs McDonald added, “Similarly, the continuing imposition of the pension transfer ban is likely to be viewed negatively by employees in NEST, when compared with colleagues enrolled with other pensions scheme providers. These employees will not be able to consolidate their pension savings in NEST, and those close to retirement may not secure the best possible income. It is also impossible to envisage a streamlined pot-follows-member process if one of the key pension providers is unable to participate.”
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