Parliamentary committee calls for removal of NEST restrictions

UK - Restrictions placed on the National Employment Savings Trust (NEST) should be relaxed to address fears it would bar the scheme from solving the "market failure" it was created to solve, a parliamentary committee has said.

Following a review of auto-enrolment reforms and the government-backed defined contribution (DC) fund, the Work and Pensions select committee said it was "very concerned" that a ban of transfers into NEST, as well as a cap on annual contributions, would undermine its purpose.

The committee said in its report that it understood the "rationale behind the restrictions placed on NEST as part of the sensitive consensus" reached between the government and industry following the Adair Turner-chaired Pensions Commission.

"However," it added, "we are very concerned that two restrictions will have unintended consequences: the cap on contributions will add complexity for small and medium businesses, and the ban on transfers will be disruptive for both employers and employees who would like to transfer existing pension pots into NEST."

The Department for Work and Pensions is currently committed to reviewing the restrictions in 2017, with National Association of Pension Funds (NAPF) chief executive Joanne Segars telling the committee last year that it would seem "rather odd" to conduct the review as planned, as changes to the auto-enrolment timetable meant not all employees would have been forced to comply with the changes at that point.

The committee expressed concerns with this, saying that if the review was not brought forward, an "overwhelming majority" of employers would have agreed on new pension arrangements, potentially excluding NEST due to its inability to meet the needs of higher-earning employees.

"These restrictions may prevent NEST from addressing the market failure that it was designed to resolve," the committee concluded.

"If [European Union] state aid rules allow, we therefore recommend that the government removes the cap on contributions and the ban on transfers as a matter of urgency."

The NAPF shifted its stance today, with director of policy Darren Philp saying that as a "key part" of the UK pension savings landscape, he of course wished NEST to succeed and accepted the rationale behind calling for changes ahead of schedule. 

"The economic landscape has changed significantly since the reforms were legislated and we can see the case for the restrictions on NEST to be removed at the current time," he added.

Hymans Robertson's head of DC Lee Hollingsworth called the recommendations "entirely sensible", saying the restrictions placed them at a competitive disadvantage to other pension providers.

"There has never been a strong rationale for having the current restrictions, and many employers we have been working with have discounted NEST as an option due to these limitations," he said, adding that auto-enrolment reforms would benefit from "having a successful NEST proposition serving the market".

However, employer lobby group CBI warned about making any changes to NEST's structure a few months ahead of the launch of auto-enrolment, saying it already possessed a "carefully balanced" regulatory framework.

Neil Carberry, the organisation's director for employment policy, said that 2017 remained the right time to address the restrictions placed on NEST.

He added: "It's disappointing that the committee has not focussed on the real reason why NEST may be struggling to compete with low-cost private sector competitors, which is its high and complex charging regime."

Legal & General agreed with the CBI's stance, with its pensions strategy director Adrian Boulding saying changes at this point would "endanger the whole auto-enrolment programme", with NEST potentially neglecting its target audience.

Boulding had expressed a similar sentiment in last year's select committee hearing.

Ros Altman, director general of Saga, meanwhile welcomed the recommendations, saying employers would not select a fund that could not cover their entire workforce.

"These two issues mean NEST take-up is likely to be far lower than forecast, leaving taxpayers with a bill for establishing a scheme that many employers and workers would not wish to use," she said.

Finally, shadow pensions minister Gregg McClymont called on the government to move from "consideration to action".

"The select committee makes a compelling case that lifting the restrictions on NEST would now be to the benefit of consumers and employers," the opposition Labour MP said.

In a welcome reprieve for NEST, the select committee dismissed criticism of its investment strategy, saying it understood concerns that it was "overly conservative", but that the fund was able to explain how it settled on its approach that will see a foundation phase target only returns in line with the consumer prices index.

"It will help to ensure that savers are not deterred by potential temporary falls in the value of their pension that might lead them to withdraw from their auto-enrolment scheme and exacerbate resistance to retirement saving," the committee said.

NEST chief investment officer Mark Fawcett welcomed the committee's opinion, saying that research had shown the best way to help members achieve a retirement savings goal was to allow for continued contributions.

He added that once past the foundation phase, members invested in the retirement date fund - the scheme's default option - aimed to outperform CPI by 3%.

"We achieve this through a diversified growth-seeking approach that does not take excessive risk but is not 'conservative' or 'low risk'," Fawcett said.

"Our aim is to carefully manage risk throughout our members' time saving with NEST to deliver greater certainty of retirement outcomes."