The proposed lifting of Nest’s contribution restrictions is dividing the pensions industry across old fault lines. John Greenwood reports
Last month the Work and Pensions Select Committee published a report calling for Nest’s contribution restrictions to be lifted now. A spokesperson for the DWP select committee says: “Our very strong view, based on our original assessment, and on further clear evidence which has emerged as implementation of automatic enrolment has begun, is that the contributions cap and the ban on transfers should be lifted now, and should not be delayed until 2017.”
Ros Altmann, unleashed from her role as director general of Saga, maintains taxpayers and workers lose out if Nest is forced to compete with hands tied. 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, she argues.
The government estimates it could save £179m in state aid if Nest achieves high membership, but the low membership resulting from restrictions will lead to a £379m burden on taxpayers
She says: “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.
She accuses private providers of wanting to cherry-pick most profitable business. She says: “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.”
But Adrian Grace, CEO of Aegon UK reckons allowing Nest an unfettered ability to compete would be tantamount to a breach of the FSA’s treating customers fairly principles because it would result in employees being put into unsuitable pensions.
Grace says the restrictions should stay as long as there is a question mark over consultancy charging, because otherwise most employers will not take advice and will simply default into a Nest scheme that might not be suitable.
His argument is that Aegon would be attacked by the FSA if it allowed workforces into a scheme it knew was not suitable for them. He singles out the Nest default fund, which is designed for risk-averse individuals more concerned with preserving their capital than seeking growth, as a particular factor that makes it unsuitable for workforces that may be defaulted into the state-sponsored scheme without advice.
He has also accused pension consultants who support the lifting of the restrictions of acting in bad faith.
TUC general secretary Frances O’Grady says: “The restrictions are a burden on both employers and workers. Employees are being prevented from maximising their savings as they approach retirement. And employers with better-paid staff cannot use Nest as a sole scheme for their staff.
“With many more employers due to start auto-enrolling staff over the next few years the restrictions should go as soon as possible.”
But Grace says: “The debate around consultancy charging is making it increasingly likely that many employers won’t have access to that advice. This increases the risk that employers will default into Nest even if their workforce is far from the target audience Nest was designed for.
“If Aegon, or any other pension provider for that matter, brought a low cost pension product to market that was specifically targeted at one group, with clear research backing up why it was potentially a good proposition for that group, and then allowed other people with different needs in through the back door, in the full knowledge the scheme might not be appropriate for them, we’d rightly have the FSA to answer to for selling inappropriate products. That is what treating employees and customers fairly is all about.
“Other than vested interest for commercial reasons, I cannot see how pensions ‘experts’ who should know better, can, with a clear conscience, argue for the restrictions to be removed.
“Nest’s default fund was designed based on the risk-averse profile of its target market, who were found to be more concerned about losing the value of their pension contributions than potential growth. Its design also assumes the majority of members will take an annuity at retirement. This simply isn’t the case for a growing portion of the pensions market.”
But Grace’s comments have drawn a sharp response from some intermediaries. Andy Cheseldine, principal at LCP says: “We disagree fundamentally with Mr Grace’s analysis. I note that he is concerned about Nest being over-conservative. Yet over the last 12 months the Nest foundation phase has produced 8.44 per cent, as against 7.7 per cent for Aegon’s balanced passive fund, the default for its stakeholder product.”