Pensions auto-enrolment: another review, more proposals

The Work and Pensions Committee's report on automatic enrolment proposes that two major restrictions on the operation of Nest should be lifted as a matter of urgency. We examine the select committee's recommendations.

On this page:
Thorough review
Key restrictions
Value for money
Administration and communication
Bad timing?
Reactions.

With the commencement of automatic enrolment for large employers fast approaching, the House of Commons Work and Pensions Committee has issued a report recommending that further changes are made to the new system. The select committee reached its conclusions after undertaking an extensive inquiry.

The report's main recommendations, which relate to the National Employment Savings Trust (Nest), are that two restrictions should be lifted as a matter of urgency. These are that:

• the cap on the annual contributions an individual can make to Nest should be removed; and
• the ban on individuals transferring existing pension pots into Nest should be removed.

Thorough review

The committee examined the implementation of auto-enrolment because it wished to ensure that what it describes as a "major policy" is delivered effectively and in the best interests of employees. As part of its inquiry it took oral evidence from a number of parties, including Minister for Pensions Steve Webb, the Pensions Regulator, Nest Corporation, pension experts and representative bodies of business and others affected by the introduction of the duty. It also received 46 written submissions.

The wide-ranging report considers the implementation of auto-enrolment from the perspective of individuals, businesses and pension providers. It examines the costs and implications for the government, the Pensions Regulator and Nest. The report also considers the potential effectiveness of the policy, together with the administrative impact on business, and the communications challenge facing the Government in raising awareness of the reforms.

The committee is broadly supportive of the actions by both the previous Government and the current coalition to push ahead with the introduction of automatic enrolment. It believes that the policy should increase levels of workplace pension savings. However, it speculates whether the system would be more attractive if it had added flexibilities built into it. The example it considers is the KiwiSaver scheme in New Zealand, where members may withdraw some pension savings to help with the purchase of their first home.

It also urges the Government to press on with reforms to state pensions. The committee takes the view that the present system, particularly with the means-tested pension credit top-ups, could act as a disincentive to individuals on low incomes saving for pensions.

Key restrictions

The aspect of the committee's work that has received the most publicity is its examination of the operation of Nest and the restrictions that the Government has placed on Nest's functions.

The committee comments that, when the Pensions Commission recommended in 2006 that there should be a low-cost default option for employers that did not already have an occupational pension scheme, it did not envisage that employers would have the option to enrol into other savings schemes. It finds evidence that the emergence of Nest has already started to influence the behaviour of the private pension market. In particular, it believes that the low charges levied by Nest are helping increase competition and that it has set high standards for communication between pension providers and both employers and the public.

However, the committee also finds evidence that problems are emerging in respect of some of the restrictions on Nest's operations, in particular the cap on the annual contribution that can be paid into the scheme (£4,200 in 2011/12 terms) and the restrictions on transfers-in.

The cap was originally set because of concerns that employers might move their existing schemes into Nest and reduce the level of their contribution. However, once someone earns more than £53,000 a year, they will breach the cap if the minimum 8% contribution is paid. This, the committee believes, will deter employers with higher-paid staff from using Nest even for their lower-paid employees. There is also some evidence that the cap will deter people from paying more than the minimum contribution into Nest. Therefore the report recommends that the cap should be removed as soon as possible.

The other restriction considered by the committee is the ban on transfers-in. It took evidence that this is an opportunity missed for individuals to place all their small pensions into one low-cost pot. Therefore it also suggests the removal of this restriction. Both recommendations are made subject to the caveat that the changes should only be implemented if state aid rules allow. These recommendations have received a mixed welcome.

Value for money

A particular concern of the select committee is that, for auto-enrolment to succeed, all pension providers, including Nest, should operate with transparency and offer products that represent good value for money. It investigated the extent to which that is the case at present. It finds evidence that it is very difficult to compare pension charges due to the different types of fees that can be applied - for example, contribution charges, annual management charges and active member discounts. It suggests that the pensions industry should establish comparison websites, such as those found in the insurance industry, which would enable employers and employees to assess which funds offer value for money. To make this work it stresses that it is imperative that the industry establishes a clear, accessible and universally adopted model by the end of 2012.

On similar lines, the committee also recommends that the government should create a model that helps protect employers against the risk that they will inadvertently select a scheme that offers poor value for money to employees. It suggests that either the government or the Pensions Regulator publishes a report every two years on the value for money of scheme charges. In addition, it believes the Government should intervene if it transpires that some auto-enrolment providers are applying hidden or excessive charges.

Administration and communication

A number of respondents to the inquiry expressed their worries about the financial and administrative impact of the introduction of auto-enrolment. Some organisations regretted the Government's decision not to exempt smaller employers from the duty, whereas others were concerned about the possibility that an exemption may still be introduced.

The committee welcomes the manner in which the Government is phasing in the arrangements. While it recognises that there will be new costs and administrative requirements, it believes that any further concessions would add to the complexity of the arrangements. However, it also notes "with regret" the delays to the schedule for the implementation of auto-enrolment, because it means that millions of people will start saving for pensions later than originally planned, leading to significant reductions in their total benefits.

A major concern for the committee was the issue of non-compliance. It believes that it is not sufficient for the Pensions Regulator to rely on whistle-blowers to help it identify employers that are not meeting their auto-enrolment duty. It suggests that the regulator may need to use more proactive methods to check compliance.

To this end, the committee reviewed the surveys of employer awareness of automatic enrolment and the effectiveness of the communication programme that the Pensions Regulator, together with the Department for Work and Pensions, has set in motion. While not critical of progress, it notes that the regulator must continue to monitor employer awareness and adjust its plans accordingly. It also recommends that the Government puts in place a source of impartial information and guidance for small employers and individuals.

Bad timing?

The Government has not yet given its reaction to the report, and nor have Nest or the Pensions Regulator. Many commentators, while welcoming some of the proposals, have expressed concern that changes are still being recommended so close to the commencement of automatic enrolment. They believe that a more appropriate time for these suggestions would have been in 2017, when the operation of automatic enrolment is scheduled to be reviewed.

Reactions

"With the introduction of auto-enrolment just a few months away, we would caution against making changes to what is a carefully balanced regulatory framework. The review of Nest scheduled for 2017 is the right time to address issues such as which controls have been placed on saving into Nest. It's disappointing that the committee has not focused on the real reason why Nest may be struggling to compete with the low-cost private-sector competitors, which is its high and complex charging regime."
Neil Carberry, director for employment policy, CBI

"These restrictions have never been in the interests of consumers and were a concession too far to vested-interest lobbying by the financial service sector. Nest has already shown that it will work in the interests of low-to-medium earners, which was the only argument with any merit for the restrictions."
Brendan Barber, general secretary, TUC

"These restrictions keep Nest tightly focused on the areas where the nation needs it. Removing the restrictions before the scheduled review in 2017 would risk Nest becoming distracted to the detriment of the very consumers it was created for."
Adrian Boulding, pensions strategy director, Legal & General

"Removing these restrictions might result in employers shutting down perfectly good schemes to move to Nest - lifting the restrictions to allow higher contributing members to use Nest should prompt Nest to reconsider its investment range as those members are unlikely to be satisfied by the investment options on offer."
Paul Macro, head of defined contribution, Mercer

"The select committee's recommendation to remove the contribution and transfer restrictions placed on Nest is entirely sensible - the current rules place them at a competitive disadvantage compared to all other DC providers." 
Lee Hollingworth, head of DC, Hymans Robertson

"The economic landscape has changed significantly since the reforms were legislated and we can see a case for the restrictions on Nest to be removed at the current time. We all want Nest to be a success - it is a key part of the UK savings picture going forward. And other players have now entered, so the risk of levelling down has weakened."
Darren Philip, director of policy, National Association of Pension Funds