The Big Question: NEST

Pensions minister Steve Webb has announced the coalition Government will take a look at auto-enrolment and the delivery of NEST. What would you like to see come out of this review?

Georgina Beechinor is a solicitor at Sackers

Given the general apathy towards pension saving, automatic enrolment is key to encouraging take-up. However, enrolling all ‘jobholders’ in this way risks those most in need of protection losing their entitlement to other means tested benefits. Before the election, the Conservatives had indicated their intention to address this by gradually increasing state pensions and reducing means tested benefits. It is therefore important to ensure that protection is built into NEST for the lowest earners.

There also remains a risk for those whose employers currently offer membership of pension arrangements which exceed the minimum qualifying requirements under the automatic enrolment provisions, that employers will ‘level down’ their pension provision. It will therefore be important for the Coalition Government to encourage retention of existing arrangements.

Keith Boughton is director – insurance and payroll at Xafinity Paymaster

I do hope any review does not lead to dilution of the intent to provide a means for more employees to accumulate some form of retirement benefit outside of that provided by the State.

I am fearful of a levelling down of employer contributions if NEST is implemented in its current form and the potential backlash of employees especially in the early years when they see the impact on their contributions of the charges made. However, my greatest fear is the reaction of employees when they come to decumulate and see the level of pension that they secure.

Employees do not have sufficient knowledge about pensions/annuities and there needs to be greater focus on providing help leading up to, and at, the decumulation stage. Pension pots will invariably be small in the early days and traditionally the industry has not been geared up to handle these in a cost effective way. NEST has previously rejected the idea of providing annuities, perhaps they should reconsider?

Peter Carter is head of product marketing at MetLife UK

The key decision should be to introduce auto-enrolment as soon as possible for pension schemes which already meet the minimum contribution standards.

Clearly NEST will be looked at closely when public spending is being scrutinised as the Government focuses on reducing the public sector deficit. The question is bound to be asked whether costs can be reduced while still delivering the desired outcome.

There is already an infrastructure in place for workplace pensions in the form of stakeholder schemes. This infrastructure could be adapted and expanded to include all employers.

Of course cost will be a key factor in these times of financial stringency and Steve Webb’s review will need to look closely at the existing stakeholder infrastructure and decide whether the same results can be achieved at a lower cost.

Jamie Clark is business development manager at Scottish Life

There are two things I’d want from the review:
1. The means-testing issue must be tackled effectively. The introduction of a Universal State Pension may be decades away but auto-enrolment and the introduction of the NEST scheme are fast approaching.

2. The ridiculous phasing rules need to be changed. These rules currently mean that a mere 2% of Qualifying Earnings is the minimum contribution required for the first four years of auto-enrolment into a Qualifying Workplace Pension Scheme. Given that NEST is specifically designed for low to moderate earners, this means that employers will be required to deduct contributions from employees at 0.8% net. For weekly paid employees, this could be pennies.

The administration cost of deducting contributions could far exceed the value of the contributions themselves. Setting such a low level also sends out the wrong message to employers and employees. Some may think this is an amount that Government believes is ‘enough’. While other employees may see no value in a tiny contribution and simply opt out.

Mark Futcher is an associate at Barnett Waddingham

Now the Government has endorsed initial charges, providers will be able to compete in the ‘low contributor’ market that NEST is targeting. This passes the ‘problem’ to the market and providers will compete on all aspects of pension provision, including; ease of administration, communication offering, range of funds offered, terms & charges, financial strength and commitment to the market.

A competitive solution would be to amend Stakeholder legislation to incorporate auto-enrolment and allow providers to make an upfront charge (of no more than the 2% that NEST is discussing), along with an annual management charge (AMC). Ideally, there would be a simple range of investment funds with competitive AMCs.

This would alleviate the need to spend millions of pounds on a new administration and premium collection platform and provide choice for employers and their employees.

Kevin LeGrand is head of technical services of Buck Consultants

There are fundamental difficulties with using a DC private arrangement to provide benefits for very low paid workers; the state is better placed to do this. However, if the non-state solution is to be pursued, the following changes would simplify the proposed system:

• Accept that the policing of compliance with the auto-enrolment requirements by smaller employers will be too expensive, and exempt employers who have fewer than five employees.
• Simplify the ‘qualifying scheme’ conditions for schemes other than NEST.
• To avoid very small pension pots in qualifying schemes when a member ceases active membership of a qualifying scheme, allow a transfer of small pots to NEST.
• Allow a simple drawdown system at crystallisation date, dividing the accrued fund by a prescribed longevity figure to provide level annual payments. If the member dies with money unpaid, the balance would fall into their estate.
• Restructure NEST charges to remove the initial 2% charge and spread it through increased annual charges.
• Adjust the rules for means-tested benefits, to ensure saving always produces a positive result. 

Ian Naismith is head of pensions market development at Scottish Widows

The most important thing is that we must avoid a delay to the introduction of automatic enrolment. We would also welcome more clarity on groups who might lose out because of means-testing, and possibly the opportunity for them to opt in rather than being automatically enrolled. And we’re looking for reassurance that the NEST proposals are robust, with charges being sufficient to repay upfront funding over a reasonable period and to meet ongoing costs.

Stephen Nichols is chief executive of the Pensions Trust

Given the coalition’s stated objective to increase the personal tax allowance to £10,000 the NEST pension ‘deal’ has become decidedly worse for the very people it is aimed at – if you are not paying any tax, where’s the tax relief top up from the Government coming from? If this situation is not addressed auto-enrolment and apathy will be to the detriment of these members.

Amendments should also be considered to the ‘test scheme’ requirements that a NEST alternative must pass if it is to be used for auto-enrolment. The current ‘test scheme’ does nothing to stop the relentless drive from defined benefit to defined contribution, leaving little scope for enlightened employers to provide risk managed defined benefit alternatives.

Therefore, a ‘test scheme’ that would allow say, with-profits money purchase or career average with discretionary indexation would be a big step in the right direction, enabling viable alternatives to ‘plain vanilla’ defined contribution.

Bob Perkins is head of technical services at Origen

The latest comments indicate that they are going to take a closer look and that it is conceivable that the scope for auto-enrolment might be reduced.

It would certainly be helpful for the Government to take a step back to consider the position but time is short. The issue of means tested benefits is ongoing and I would like to see them address that particular matter. It has been suggested that the lower earnings level for auto-enrolment be uplifted to £10,000, which would certainly be a start.

I would hope the Government will iron out any confusion in relation to part time workers and in particular in relation to agency/contract workers and who has responsibility for dealing with auto-enrolment. Employers need to be especially careful about how contracts and agreements are worded so that they don’t unwittingly take on additional costs.

Adrian Shandley is managing director at Premier Wealth Management

The thing that I would like to come out of any review by the new coalition government is a little bit of common sense. History is littered with failed government initiatives on pensions, such as stakeholder.

I don’t have a particular problem with auto-enrolment, so long as employers are given a long notice period in order to factor the costs into the wage bill. Auto-enrolment may actually help to get a lot of people saving.

NEST on the other hand is an expensive proposal that is doomed to failure for so many reasons, and it should be scrapped with immediate effect.

The bigger, more fundamental problem to address is the short term horizons that many people have in their “can’t save, won’t save” culture. The people who take responsibility for their own lives and their own actions are the people who are most likely to save significant amounts for their retirement.

The basic problem is the people who expect the State to do everything for them, take no responsibility for their own actions and insist that, for everything that happens to them, there must be somebody to blame. These are the very people whose attitudes so desperately need to change. 

Andrew Tully is senior pensions policy manager at Standard Life

If auto-enrolment proceeds as planned then we believe NEST is an integral part of the jigsaw, particularly in providing an option for small and micro employers who cannot find terms from private sector providers.

One key issue which needs to be resolved is the interaction of automatic enrolment and means-testing. It needs to be clear to people that it pays to save. Otherwise there is a significant risk that many of the target market – low to medium earners who don’t currently save – will choose to opt-out.

I would also like to see the new Government clear away the myriad tax rules, and replace it with a more flexible savings regime. People also need to be better equipped to make confident and well informed choices.