Adrian Boulding, pensions strategy director, Legal & General
Yes: I think it is a reasonable way of collec-ting contributions. The coalition Government is doing a wholesale review of everything and is asking everyone where they can cut money. With that in mind, we favour the idea of using the National Insurance system to collect pension contributions instead of building a new system.
If this were the case, they would only have to build about half of what Tata Consultancy Services are planning to build, which is currently both a collection system and a record-keeping system. That plan is a big task and will cost several billion pounds.
A system with its own collection system would mean employers have to fill in two forms each month – they would have to fill in their pension form and send that to Nest and they would then have to fill in their tax forms and send them to HM Revenue & Customs. So, It would not be a huge change to just nudge the Nest contribution rates a little to get them in line with current NI thresholdsto amend the NI system would halve the burden on the employer and it would be the very small businesses, for which Nest was created, who would benefit most from this, as they are the ones who do all their own paperwork.
It would not be a huge changeto just nudge the Nest contribution rates a little to get them in line with current NI thresholds
It also makes sense to use something that already works. Contractedout personal pension contributions are already collected up by the NI system. Currently, the employer does not fill out any more forms, HMRC in Newcastle does all the calculations, works out which part of the payment is the pension contribution and they then send that to the pension provider. This system is functioning already and it even has a system for corrections.
There are drawbacks to using the NI system. Naturally, there is never a perfect solution. The first drawback is that the money turns up late. HMRC only gets a full picture of NI at the end of the year and the collections for personal pensions only come to the provider from May through to about August in the following tax year. So if the NI system were to be used for Nest, there would be about a half a year of lost investment growth. But interest rates are low so I think it is a downside worth bearing in order for the taxpayer to save.
The other problem is that the proposed contribution thresh-olds of Nest do not quite fit with NI thresholds and these would have to be in tandem for the systems to work together. But they are close and it would not be a huge change to just nudge the Nest contribution rates a little to get them in line with current NI thresholds.
John Lawson, Head of pensions policy, Standard Life
No: NI systems are used to collect contracted-out contributions right now and they are invariably wrong. HMRC data never ever matches up. It may credit certain amounts and then six months later comes back to reclaim amounts from providers or will even make up shortfalls that they should have given the provider in the first place.
Also, the NI system is around 18 months behind the curve. Currently, if you are paying into a contracted-out pension, you have to wait 18 months for your contribution to be invested. It takes so long because all contributions are reconciled at the end of the tax year and then HMRC makes the pension payment across to providers during the following tax year. The payments are made in stages and on average it is about 18 months to receive contribution but it could be as long as 21 months.
If this were the case with Nest, The Government would have to spend millions on the existing, creaking NI computer system and it already announced an IT budget freezeyour contributions would not be invested in the market for almost two years. How would the Government calculate that missed interest? Would it give contributions credit for a return on Government bonds over the period? I am not sure but it would be a very messy process.
The Government would have to spend millions on the existing, creaking NI computer system and it already announced an IT budget freeze
The providers who favour using the NI system are those with a lot of individual pensions. Most employers with a large amount of employees with individual pensions will want to put all their employees into a group scheme, either a group personal pension or into Nest. But if the Government allowed employers to use the NI system, then each individual could make their own choice about what auto-enrolment scheme they went into and the prov-iders could still get the contribution coming in on the existing individual scheme. While this concept has some appeal, there is a danger that it would ultimately hasten the dumbing down to the lowest level of 8 per cent because the employer would not see their employee’s personal pensions as their own schemes. Why should the employer bother contributing more than the minimum if the pension wasn’t seen as benefit to staff but instead something they were having to pay into by law?
Using the NI system would also subsidise Nest because if the Government would be paying for the contributions collections, Nest would save money whereas competing providers such as ourselves, would still have to collect contributions through our systems. On top of everything, the Government would have to spend millions on the existing, creaking NI computer system and it has already announced an IT budget freeze.