Not enough time to resolve trust/contract dilemma warns Nest review chief

The government may not have enough time to resolve the regulatory imbalance between trust and contract-based pensions in time for auto-enrolment, warns IFS economist and review chief Paul Johnson.

Johnson, who led the review into Nest and auto-enrolment that was published last month says leveling the playing field between trust and contract would need a review all of its own, and questioned whether there was time to introduce changes before the onset of new employer duties in 2012. Instead the government may opt for a wait-and-see approach to gauge the extent of the issue, which could see a trend back towards trust-based arrangements because of their ability to refund employees contributions within two years, before deciding to act, he says.

Johnson defended the decision to include micro employers within the policy, as not doing so would exclude more than a million people from building up their own pension and would act as an obstacle to growth for small companies.

Speaking at a Friends Provident global forum event in London last week Johnson said: “The trust v contract issue is very complicated and it is extraordinarily hard to see ways round it. I can’t really see the government moving contract-based schemes in the direction of trust as a way
forward. Allowing everyone to take out contributions after two years would rather defeat the point of the whole exercise.

“Equally moving everyone in the contract based direction would not go down terribly well in the occupational pension world. The problem is rooted in way the differences between the two different types of pension scheme have built up over time and is going to take some pretty careful work to unravel that. There may be an approach of waiting and seeing how big an issue it is before deciding how big a change is needed to deal with it.

“Given where we are and where launch is and the complexity of the issue and the work they would need to do before then, whether there is even time to do that I don’t know.

“There are good reasons for not excluding small businesses. Firstly there would be over a million people excluded from auto-enrolment and that would undermine the policy. And practically it would be very difficult to identify small employers. What do you do if they go from five employees to four ? And it becomes a barrier to growth where a company with four employers wants to go up to five. In end it was a combination of those things.”

Trevor Matthews, chief executive of Friends Provident said: “This report makes fantastic progress. We now need to make some decisions and either work out a way to reduce this disincentive to go one way, or accept that this is the way it is going to be and accept that there will be a
lot more trust based schemes.”