The Centre for Policy Studies has warned that the Government might make auto-enrolment compulsory, as Nest’s cautious investment strategy and the current economic conditions are likely to lead many people to opt out of the scheme.
Speaking at the Tax Incentivised Savings Association annual conference in London last week, CPS research fellow Michael Johnson said CPI inflation stands at 5 per cent and Bank of England’s bank rate is 0.5 per cent, creating a 10:1 inflation-to-interest-rate ratio that is unparalleled in UK history.
He said: “Combine Nest’s ultra-cautious default fund strategy with that inflation-interest-rate picture and what is going to happen? We are almost certain that within a few years time there will be many people in Nest who have lost capital, so opt-out rates will start to soar, the Government will start to panic and in a kneejerk reaction it will introduce compulsion. That is a realistic prospect.”
In November, pensions minister Steve Webb defended Nest’s default investment strategy which aims to return CPI plus 3 per cent. He said the strategy is aimed at young people and is intended to make returns early on to build confidence in the scheme.
Webb also indicated that he does not want to make auto-enrolment compulsory because going into a pension is not always the right option.