Restrictions on NEST undermine auto-enrolment objectives

Constraints put on the National Employment Savings Trust risk undermining the objectives of auto-enrolment, warn some of the legislation’s main architects.

Appearing before Parliament's work and pensions select committee this morning, Baroness Drake said the ban on transfers into NEST would work against savers.

Drake - who was acting chairman of the trust's predecessor the Personal Accounts Delivery Authority before being appointed a Labour peer in 2010 (PP Online, 2 July, 2010) - said: "That can only support the industry, it cannot support employees."

Institute of Fiscal Studies director Paul Johnson - one of the authors of last summer's Making auto-enrolment work review - added that the £3,600 cap on annual contributions to NEST sent a "very odd message".

Speaking at the same hearing, Hermes Focus Asset Management chairman David Pitt-Watson put the cost of this cap to the taxpayer at £100m.

Drake said the cap, combined with the three month opt-out period included in the Pensions Bill working through parliament at the moment, would prevent casual workers from building a decent pot.

She said the cap would also add complexity and expense to employers who may be forced to operate more than one scheme.

Drake added that the persisting presence of short service refunds for contract-based schemes - which pensions minister Steve Webb has vowed to address (PP Online, 6 September) - could make trust-based schemes such as NEST less attractive to employers.

"I'm concerned at the way these refunds are being used by some," she said. "It's against public policy and could leverage against NEST."

In May, Pitt-Watson publicly attacked the legislation for failing to put enough quality controls in place to protect employees who were auto-enrolled (PP Online, 15 June) and he and Drake returned to the theme today.

Drake expressed concern at the lack of a quality test on schemes which would be deemed as a qualifying alternative to NEST.

She called on the secretary of state to use extend the quality standards to include a duty of care toward the pots of deferred members and a credible investment strategy.

Despite these reservations, all three participants agreed auto-enrolment and NEST would have a positive impact on saving.

"We need to improve what is a very inefficient pension system, and NEST is a very good step in the right direction," said Pitt-Watson.