The National Employment Savings Trust is the UK government's solution to the pensions problem, but it has met with some controversy, as Jenna Towler reports
Great Britain is braced for a big year in 2012. Not only will the world’s best athletes be descending on London for the summer Olympics but the occupational pensions landscape will be forever changed as auto-enrolment regulations come into force.
The 2012 package of reforms has been driven through by the Labour government with full political consensus from its rivals. All parties, Labour, the Conservatives and the Liberal Democrats, backed the need for change to tackle the problem of 12 million people either not saving enough, or not saving at all for retirement.
We have a basic state pension, state second pension, pension credit, pension credit guarantee and if you make it to 80 we give you an extra 25p a week – good for you
The problem was investigated and analysed by the Pensions Commission, under the chairmanship of (now) Lord Adair Turner with the final report being delivered in 2006. The commission recommended numerous changes to the notoriously complex state pension system including reinstating the link to average earnings; reducing the number of qualifying years necessary to attain full basic state pension; and gradually increasing the state pension age.
It also urged policy makers to introduce auto-enrolment into workplace schemes for workers aged between 22 and state pension age; provide low earners with a cheap pension vehicle; and make 3% employer contributions a mandatory minimum. Between 2024 and 2046 the UK state pension age for both men and women is to increase from 65 to 68.
And so, politicians put aside their differences and compromised to get to a middle ground to secure a decent outcome for all stakeholders. Civil servants worked with politicians, unions, employer organisations and consumer groups to come up with a solution to the burgeoning problem of pensioner poverty which, if unaddressed, would cause future governments enormous problems.
Building a nest
The UK government outlined its plans in a White Paper Security in retirement: towards a new pensions system in 2006. The focus of the reforms will see auto-enrolment rolled out across the working population over a four-year period, starting with larger employers in October, 2012 to final full implementation through all micro-businesses in 2016.
Employers will have to give staff access to either a “qualifying” workplace pension scheme – which will be judged against criteria set by the government – or auto-enrol them in to the National Employment Savings Trust, known to consumers as NEST.
Workers will, however, have the choice to opt-out, but that has to be an active decision made every three years.
The wheels of change turned slowly but successive consultations, bills, acts of parliament and regulations have led to a point where the progress of NEST looks almost unstoppable.
Life and pensions provider Standard Life whole heartedly backs the concept of auto-enrolment and thinks NEST will help people at the lower end of the earning spectrum.
Senior pensions policy manager Andrew Tully said the need for change was obvious to everybody.
He explained: “It was needed because voluntary tax incentives were not working. While high earners were saving, a significant amount of lower earners were not saving. About 20 million people work for private sector employers in the UK and there were about nine million in the pension schemes.
“I think that shows that volunteerism wasn’t working. With the demographic and financial challenges that we are facing it was clear we had to make changes.”
He said auto-enrolment was an “obvious next step”.
NEST, formerly known as personal accounts, has always had a clear message – that it will not be competition with existing provision. Whether that will work in practice is still up for discussion.
Tully added: “From our point of view we fully support auto-enrolment. We think it is a good thing – it should improve pension coverage in the UK. NEST, we believe, is required to target the lower end of the market because providers are not able to do that on a profitable basis.
“What I expect to happen is NEST to take the bottom end, us to continue to take the top end and there will be a bit in the middle which we effectively compete over – but we are quite comfortable competing with them.
“We believe our offering will match their offering. We are confident that we can compete with them in that middle ground.”
The fear of “levelling down” in pension provision has led to many criticisms of the new scheme, which is set to become one of the largest defined contribution schemes in the world. For the first time in the UK all employers will be required to contribute a minimum of 3% (on a band of earnings) to an eligible employee’s workplace pension scheme. This will go alongside mandatory 4% employee contributions and 1% tax relief from the government.
To combat fears of encroaching on existing provision there will also be a contribution limit of £3,600 per year (based on 2005 earning levels) and a general ban on transfers in and out of the scheme.
The relatively low contribution rates have caused consternation among industry professionals, some saying they are too low to achieve a sufficient retirement income and others raising fears that employers who currently provide greater benefits could be tempted to slash what is currently on offer.
Levelling down, twinned with concerns that some savers on means-tested benefits could actually lose out financially by saving, have plagued the reforms in the media and provoked the government to undertake research into the matters to reassure the public.
In its Fit for the Future: NAPF’s vision for pensions report, The National Association of Pension Funds outlined its desire to see the minimum contribution into auto-enrolled schemes increase to 11%.
The report said: “The pension reforms due to start in 2012 – based on auto-enrolment and mandatory contributions – provide the right framework for securing higher levels of coverage. But with the statutory minimum level contributions set at 8%, they may not provide the right outcome in terms of adequacy, even if underpinned by a higher state pension.
“If future generations of pensioners are not to suffer the same fate as previous generations and retire into poverty, contributions must be increased beyond the current 8% minimum. The NAPF believes that over time the statutory minimum contribution rate should increase to 11%.”
The trade body said this would increase the replacement rate available from a DC scheme for a median earner from just under a quarter to a third.
However, with all the concern and debate around the rights and wrongs of the plan, NEST has been slowly building pace.
It has appointed its administrator, TATA Consultancy Services, it has decided on its charging structure (an initial 2% contribution charge, followed by a 0.3% annual management charge) and it has picked its trustee board, which will be led by former Pension Protection Fund chairman Lawrence Churchill and Pensions Commission member Jeannie Drake.
However, Pinsent Masons head of strategic development for pensions Robin Ellison remains unconvinced NEST will go the distance.
The former National Association of Pension Funds chairman told GP: “I agree with the conclusions of the government that pensions, for most people, in this country are too low. You can show that because if you just have a state pension you get income support on top. The question is – what is the solution? The solution that the government came up with, on the advice of Adair Turner, was NEST.”
Ellison is firm in his belief that NEST is a “complicated solution” which will “probably not achieve its objectives”.
He said: “It carries with it immense administrative and investment risks. It is an inappropriate solution to the problem. What we have built is a fourth state pension system which has within it the seeds of its own destruction. The intention is good but the execution is a mistake.”
The need for reform
Ellison said the government should have tackled the massive underlying problem of state pension reform properly and left any desired additional provision to the individual.
“The problem is poor people. People at the lower end of the income scale who either don’t or mostly can’t afford to save for their old age. The way that is normally solved around the world is not doing what we are doing. It is putting in a proper state pension system.
“We have one of the most, complicated state pensions systems in the galaxy. We have a basic state pension, state second pension, pension credit, pension credit guarantee and if you make it to 80 we give you an extra 25p a week – good for you.
“We have thousands of civil servants administering a very complex system, if you talk to anybody in the industry there is a pretty universal consensus – which the government does not accept, and the Conservatives refuse to accept either for reasons I do not understand – to burn the existing framework and just have a basic state pension of ‘X’ pounds at ‘Y’ age topped up by private arrangements.”
But Ellison’s comments will continue to fall on deaf government ears.
Pensions minister Angela Eagle has been tasked with bringing these reforms to fruition and she remains utterly committed to NEST and its ideals despite a looming general election.
In a recent pre-election interview Eagle said: “NEST will give up to 10 million more people who are not saving into an occupational pension with a guaranteed employer and government contribution, a chance to do so.
“That is a top priority and ought to be for any government that comes in.”
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