Critics point to fundamental flaws in Nest pension scheme

http://www.guardian.co.uk/money/2012/jun/04/nest-pension-flaws

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The government is facing criticism for undermining its own pension scheme for low-earning savers after it refused to lift restrictions which critics say have "hobbled" the scheme.

From this year, workers in companies without a pension scheme will be automatically enrolled into the National Employment Savings Trust (Nest), with employers also required to make a contribution on behalf of every staff member who does not opt out. With official figures showing that fewer workers are now paying into occupational pensions than at any point since the 1950s, Nest enjoys cross-party support as one important answer to the slow-burn disaster evolving in Britain's retirement saving.

But after lobbying from the insurance industry, Nest was saddled with restrictions that cap contributions and bar the scheme accepting transfers from pensions that people may bring from previous jobs. The upshot is that some workers will need to run several pensions in parallel, which critics, including the TUC, say will undermine the aim of making it easier to save.

The restrictions also run counter to what pensions minister Steve Webb describes as "operation big fat pot" – the plan to allow workers to consolidate all their retirement saving in one place.

In a report in March, the work and pensions select committee proposed removing these restrictions, stating that they were "disruptive" and "may prevent Nest from addressing the market failure that it was designed to resolve". The government last week responded to this report, insisting that "it would not be lawful for the government to remove the restrictions simply to increase takeup of Nest", because of European rules attaching to the state aid with which Nest was set up.

But critics suspect that a smokescreen is being created to allow for capitulation to the financial services industry. Labour's pension spokesman, Gregg McClymont, said: "EU state aid rules no longer apply to Nest … The government can and should lift the restrictions on Nest for the benefit of British savers. No doubt the government has heard otherwise from those in the pensions industry who do not want a low-cost, high-quality provider competing with them."

Nest is an autonomous not-for-profit trust designed to cover its own costs from the low charges it applies, but government loans were required to establish it, which is where the question of state aid to industry rears its head. The European commission's original decision on Nest in 2009 acknowledged that state aid law restrictions did apply, but only on the grounds that Nest did not yet meet the criterion of being a "typical undertaking" as it was not yet operational. Nest is now up and running and so passes this test; it had already met all three of the other conditions defined by the landmark Altmark case as allowing exemption from the state aid rules, such as transparency.

The government says it is holding discussions with the commission. McClymont added: "The government is going cap in hand to Brussels. It ought to realise that this is unnecessary since EU state aid rules no longer apply to Nest. What's worse is that by approaching the commission, Whitehall is effectively inviting the commission to impose its own restrictive conditions."

The TUC general secretary, Brendan Barber, said: "The restrictions on Nest serve neither consumers nor employers. Nest was hobbled to keep the pensions industry sweet, not because it made sense. A wide cross-party consensus wants to abolish [the restrictions] and allow Nest to take its proper place in solving our pensions crisis.

"Ministers should not give up on getting rid of them at the first sign of legal difficulty or industry lobbying. Instead they should look to find a way through EU rules, which it now looks as though may not even apply."

John Hills of the London School of Economics, who sat on the pensions commission, said: "The huge advantage of Nest is that it is a lifetime account. This avoids the costs that bedevil small pension pots when people move between them or stop and start working, and have to set up a new account each time with front-end charges.

"Anything that blocks savers' ability to consolidate their pension saving in the low-cost scheme runs the risk of reducing the return on their retirement savings – at a time when the underlying returns are already far lower than was hoped a few years ago."

A spokeswoman for the Department for Work and Pensions said the government welcomed the select committee's report and that ministers would reflect further on it. But she added: "Evidence that the restrictions on Nest are a barrier [to saving] is not unequivocal."

In relation to state aid restrictions, she said Nest's public service remit required it to focus on moderate earners: "The restrictions are part of the definition of this public service obligation."