By most objective measures, automatic enrolment can be deemed a success.
While Government-backed Nest pension scheme continues to enjoy special treatment from the Government, in terms of both funding and promotion, other organisations have provided much needed competition which will ultimately lead to better consumer outcomes.
The success of the competition, despite the vast sums of taxpayer investment in Nest, may have influenced the recent Government decision to lift all restrictions on Nest. This will mean that in addition to the favourable funding and promotional position it enjoys, Nest contribution limits and transfer restrictions will be removed too.
The contribution limit will be lifted from 2017 and restrictions on individual transfers in and out of Nest will also be removed to coincide with the start of the ‘pot-follows-member’ regime.
The ban on bulk transfers will remain in place until the end of the main roll out period for automatic enrolment in April 2017, when it will then be lifted.
We welcome the Government’s decision to leave restrictions in place until 2017 and share the views of the National Association of Pension Funds, the Department for Work and Pensions and others that doing so provides certainty for businesses, consumers and the pensions market while ensuring Nest concentrates on what it was originally set up to do.
We support the maintenance of restrictions until 2017, but a framework needs to be put in place long before then to ensure fair market competition.
As the DWP has publically acknowledged, a key reason that the current annual contribution limit and transfer restrictions were put in place was because they were cited by the European Commission in its approval of state aid for Nest. Why? They were seen as essential to reducing “market distortion”.
This begs the question, if they were essential to preventing market distortion, wouldn’t their removal distort the market? Having a heavily subsidised state backed pension provider have free reign on the market should not be taken lightly.
Like most of our competitors, we would like to see a level playing field in the pensions industry. This alone will drive competition and innovation, ultimately resulting in better outcomes for consumers, the taxpayer and the wider economy.
One important area where this could be achieved is on pricing. The lifting of Nest restrictions provides another opportunity to re-examine this thorny issue. It is not clear, based on Nest’s current two-tier charging structure, at what charge Nest will take in transfers or how this pricing will be controlled.
Charging structures have repeatedly been highlighted as a significant problem, most recently by the Office of Fair Trading on 15 July. This is primarily due to the lack of clarity brought about by the various different charges imposed by different companies. These varying approaches make like-for-like comparisons for employers and employees very difficult.
We think this problem could be easily resolved by agreeing on a standard industry-wide charging basis that must be declared at the point of purchase, similar to an annual percentage rate for loans.
All providers would be required to show their charges in this prescribed format. This would enable employers to make an informed choice rather than simply hoping for the best. It would also ensure the focus is on producing a quality product at the best possible price, rather than finding new creative ways of differentiating their pricing methods to appear lower.
Even NEST charges what superficially seems to be a lower charge – a 0.3 per cent annual management charge. But it also charges a 1.8 per cent contribution fee so if a member’s contribution is £100, a fee of £1.80 will be deducted.
Other organisations offer more complicated charging structures including initial costs, flat rate administration fees, adviser commissions, AMCs and various other pricing elements all for a single pension scheme. This makes comparison between schemes extremely difficult.
The Association of British Insurers’ recently launched comparison tool is a massive step forward in helping employers compare. However, it requires several fields of data to be entered before a comparison can be made, demonstrating the inherent complexity. We need more change than this and we need to be radical.
The People’s Pension operates a simple and transparent charging structure of a 0.5 per cent AMC with no hidden charges, fees on transfers or additional charges for employers. We do not pay commission or fees to any third parties such as consultants or advisers.
A fully inclusive charging structure is the simplest and most transparent approach. Implemented on an industry wide basis, it would serve as a key driver in safeguarding consumers, helping employers and ultimately improving consumer engagement and outcomes.
Jamie Fiveash is director of customer solutions at B&CE, provider of The People’s Pension