Lifting Nest’s restrictions can only be a good thing - but certainty is more important than speed
The shackles on Nest moved a step closer to being removed this week.
Under existing rules, Nest members can’t transfer in or out, while contributions into the scheme of last resort are capped at £4,600 per annum.
This means that if the employer and/or the individual Nest member wants to make a bigger contribution, they would have to make the payment into a personal pension plan, which doesn’t exactly encourage the savings culture the scheme was set up to foster.
The restrictions were established as a condition for the loan Nest received from the Department for Work and Pensions when it was set up.
Allowing Nest to freely compete with other providers, having effectively received a state subsidy, ran the risk of falling foul of the European Union’s state aid rules.
However, the transfer restrictions threatened to undermine pension minister Steve Webb’s push to allow members to take their retirement pots from one scheme to another when they move job.
“The argument in favour of artificially restricting Nest’s ability to compete directly with its pensions industry peers is no longer relevant”
Excluding such a pivotal player threatened to make a mockery of the new transfer freedoms.
Darren Philp, director of policy and market engagement at rival mastertrust B&CE, said: “It was clear that they would always have to ease the rules because there was no point having an automatic transfer policy if one of the large schemes couldn’t participate.”
In addition, competition has developed in the auto-enrolment since the introduction of the initiative in autumn 2012.
Out of the approximately 4 million and counting individuals who have been auto-enrolled since then, Nest has just over 1.5m members, drawn from nearly 9,000 employers.
Tom McPhail, head of pensions research at Hargreaves Lansdown, said: “The argument in favour of artificially restricting Nest’s ability to compete directly with its pensions industry peers is no longer relevant.”
Under this week’s announcement, the government will proceed with removing existing restrictions on bulk transfers to and from Nest, but only in 2017, in line with its previously outlined timetable.
Individual transfers in and out of Nest may be possible from 1 October 2015 though.
The announcement follows the receipt of advice from the European Commission stating that it will not block the move.
Under the government’s original plans, the restrictions on Nest would have been reviewed in 2017.
However even this faster timetable is too slow for some. By 2017 when the restrictions are lifted, all but the tiniest micro-employers will have chosen their pension provider.
Labour’s pension spokesman Gregg McClymont has pledged to lift the restrictions immediately through an amendment to the Pensions Schemes Bill, which is currently going through Parliament.
David Piltz, head of trustee services at Buck Consultants, backed McClymont’s move. In a blog published this week, he wrote: “Let’s lift the shackles now and let Nest and the pension providers compete on a level playing field. It can only be in the consumer’s best interest to let Nest compete fairly – and let the best man (or organisation) win.
“The only downside in doing so is that pension providers might have to compete with Nest for the nice juicy clients now!”
However, in the light of Webb’s previously stated concern that any move to fast-track the lifting of the restrictions would be challenged by other providers in court, Towers Watson senior consultant David Robbins said certainty was more important than speed.
“Any doubt that lifting these restrictions would be subject to legal challenge would not have created the desired outcome in terms of certainty.”
And Nest itself appears to have settled for 2017, adopting a less robust tone than last year, when it was pushing for the restrictions to be lifted as rapidly as possible.
However even though the market has worked so far, Philp argued that ministers should establish a pensions version of Ofgem, in order to ensure that the auto-enrolment market was working effectively but also equitably. The DWP has an interest in Nest’s success not only for the sake of the wider auto-enrolment project but also because it has a financial interest in the scheme, he pointed out.
Philp said “Part of the DWP being a steward for Nest is making sure that arrangements are effective but also making sure that Nest gets its money back.”
Perhaps the need to ensure that Nest is operating on a level playing field could be the factor that spurs the long overdue revamp of pensions regulation.