MPs publish report on automatic enrolment in workplace pensions
15 March 2012
The Government should lift two key restrictions on the operation of the National Employment Savings Trust (NEST) as a matter of urgency, according to a report published today by the Work and Pensions Select Committee.
Starting in October 2012, millions of employees will be automatically enrolled into workplace pension schemes for the first time. Employers will be required to establish a pension scheme for their staff and they must also make a contribution to each employee's pension.
The Government established NEST as a low-cost pension scheme to help deliver the auto-enrolment programme. However, the Committee believes that certain restrictions placed on NEST will create complexity for employers and will disadvantage some employees.
The Chair of the Work and Pensions Committee, Dame Anne Begg MP, said:
"Auto-enrolment is a welcome reform that will encourage high participation in workplace pension schemes. We welcome the Government’s overall approach and have made several recommendations designed to help make sure the programme is a success.
By lifting these two key restrictions placed on NEST, the Government would remove barriers that might currently prevent employers from choosing NEST as their pension scheme, as well as making it easier for employees to bring together the other small pension pots they are likely to have. This will help reduce the multiple administrative charges that many people pay and help them to understand the total retirement savings they will have built up."
The report, Automatic enrolment in workplace pensions and the National Employment Savings Trust, highlights a number of issues (quotes are from the Chair of the Work and Pensions Committee, Dame Anne Begg MP):
1. Removing the restrictions on NEST
- The Government established NEST as a simple, low-cost pension scheme which has a public service obligation to be available to all employers who wish to use the scheme to meet their auto-enrolment requirements.
- The Committee's report recommends that, if state aid rules allow, the Government should remove the following restrictions on NEST as a matter of urgency:
- The cap on the annual contributions an individual can make to a NEST scheme. The Committee believes that this cap will result in severe complexity for businesses, as it would mean that employers with higher-paid employees could not use NEST as their single pension scheme.
- The ban on individuals transferring existing pension pots into NEST. The Committee believes that this will be disruptive both for individuals who would like to consolidate separate pension pots into their NEST scheme, as well as for employers who would like to operate a single occupational pension scheme.
"NEST was set up to address a market failure in the pensions industry which meant that many employers and employees were unable to access low-cost, good quality pension provision.
However, the restrictions make it impossible for NEST to meet the needs of all the employers and employees who might want to use it. Unless the restrictions are removed, many employers will still not be able to access its low-cost pension scheme, and many of the employees for whom it was intended will not be reached."
2. Reforming the State Pension
- Auto-enrolment is intended to form part of a package of Government measures which would also include reform of the State Pension system. This is likely to involve introducing a flat-rate State Pension, reducing the level of means-testing and enabling people to see clear benefits from retirement saving.
- The Committee urges the Government to proceed with its plans for State Pension reform without delay and introduce a Bill to this effect at the beginning of the 2012–13 parliamentary session.
“Because of means-testing, the current State Pension arrangements can act as a disincentive to some individuals on lower incomes who are considering workplace pension saving.
The Government must act swiftly to establish a simpler, flat-rate State Pension. This will enable people to increase their workplace pension saving with confidence that they will not be penalised by losing state benefits in retirement.”
3. Ensuring pension schemes offer value for money
- The report highlights the difficulties and complexity employers and employees currently face in comparing the fees and charges applied by pension providers.
- The Committee welcomes the work that the National Association of Pension Funds (NAPF) is undertaking with the pensions industry to improve transparency and calls on the industry to establish a clear, accessible and universally-adopted model to allow the comparison of charges by the end of 2012.
- The report recommends that, from 2013 onwards, if some auto-enrolment schemes still have hidden charges, or charges that represent poor value for money, the Government should use its powers to intervene.
"Pension providers must be able to demonstrate clearly and transparently that they are offering value for money for employees who are automatically enrolled.
"In the insurance industry, comparison websites enable people to compare providers. Our report recommends that the pensions industry should aim to establish a similar model."
4. Implications for employers
- Auto-enrolment will impose new costs and additional administrative duties on employers, and may be particularly challenging for small employers. The Committee considers that the Government has taken appropriate steps to minimise the impact on businesses though its gradual and flexible approach ("staging and phasing") to implementation.
- The Committee supports the Government's decision that auto-enrolment should apply to employers of all sizes. Exempting small employers would create significant complexity, as well as excluding many employees from the benefits of workplace pension saving.
"We appreciate that auto-enrolment will create new costs and administrative requirements for employers at a time of economic uncertainty.
We considered carefully calls for some exemptions for smaller employers. However, this would not only create significant complexities in implementation, but would also mean that pension saving would not reach employees in smaller businesses who have always been the hardest group to reach in terms of workplace pension provision and who are one of the key targets for auto-enrolment."
Although we understand the rationale behind it, it is regrettable that the Government has delayed implementation of auto-enrolment for some employers by a year. It is a vital that there is no further delay in the roll-out and we welcome the Minister’s firm assurance that there will be no further changes to the implementation timetable."
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