Nest Pension may fail over high and complex charges - CBI

19 Apr 2010 01:46 PM

The Government's new workplace pension scheme could deter millions of savers because of its high and complicated charges, the CBI warned today (Monday).

Businesses are worried that staff, and particularly the lower paid, will baulk at the proposed charging structure of the National Employment Savings Trust (Nest), which loads fees towards the earlier years after a pension is opened.

Nest will be introduced in 2012 as part of a plan to secure a much wider take-up of pensions among 11.7m workers in the private sector - a principle the CBI fully supports. Employees will automatically be enrolled in a pension scheme unless they choose to opt out, and Nest will cover staff whose employers do not have their own scheme.

But this approach could be undermined when savers realise that putting money into a Nest scheme will leave them worse off for well over a decade when compared with saving into a pension with significantly lower average charges.

This may prompt many, particularly those in their 40s and 50s who will only save for a few years in Nest, to think they are getting a poor deal. They may then immediately opt out of Nest, leaving them with lower pensions and defeating the government's aim of boosting saving for retirement. Research by the Personal Accounts Delivery Authority showed that the public shared these concerns.

John Cridland, CBI Deputy Director-General, said:

"Nest is a key part of extending the offer of a good pension to everyone in the private sector. The scheme is meant to be low-cost and easy to understand, so that it spurs people to start saving. But the risk is that many staff will think they are getting a raw deal, and will quit the Nest scheme.

"The next government needs to revisit the structure of these fees. We must make it easier for the low-paid to save by smoothing the cost, instead of front-loading it. The pensions timebomb is ticking loudly, and more people must be encouraged to save."

Nest members will initially be charged 2% of their contribution when they pay money into the scheme, which is meant to cover the set-up costs of the whole Nest scheme. On top of that there is a 0.3% annual management charge (AMC).

CBI calculations show that for the first 16 years after a pension opens, a saver in a private sector scheme running with an AMC of 0.4% and contributing £1,000 per annum is better off than their equivalent in a Nest scheme. Even a relatively high AMC of 0.6% - a rate which is already available to many firms - will be more attractive than Nest for the first six years.

Nest is a cheaper option over longer timeframes, but the risk is that employees will not recognise the long-term view. They may also be unprepared or unable to save for long enough, or are unwilling to trust that the scheme will stay in place for two decades.

Any large scale defection from Nest may also mean that the scheme is unable to keep the existing proposed charging structure, and will have to raise the fees even further.

While the Government says the contribution charge will be lowered after about 20 years, the CBI believes the current charging structure must be changed as a matter of priority to bring it more into line with the low-cost, simple solution which the Turner Commission envisioned in its review of pensions in 2006.
19 April, 2010

Notes to Editors:

2. A background document from the CBI on the Nest charging structure is attached.

3. The Personal Accounts Delivery Authority published its research 'Personal accounts: Attitudes and reactions to possible charging structures' in 2007.

4. The Turner Commission found that 11.7 million people were in work but were not saving for retirement.

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