7th March 2013

Scottish Life: MPs want NEST restrictions removed now

The existing automatic enrolment legislation includes restrictions on NEST that do not allow transfer either in or out of NEST and set a maximum annual contribution cap for NEST. The legislation also allows for a review of these restrictions in 2017.

In its 2012 report on automatic enrolment and NEST, the Work and Pensions Committee recommended that the restrictions on NEST should be removed 'as a matter of urgency'.

As a result of that recommendation, on 6 November 2012, the Department for Work and Pensions (DWP) announced a consultation on the transfer restrictions and contribution cap in NEST.

That consultation closed on 28 January 2013 and this new report, essentially the committees response to the Government consultation, re-confirms its recommendation that the NEST restrictions should be removed as soon as possible.

Why were the restrictions put in place?

The report looks at the original rational for the restrictions that include:

• NEST has a public service obligation to be available to all employers that wish to use it. As a result it is funded by loans and grants from the DWP totalling around £180 million.
• Concerns from the pensions industry that because of this state funding, NEST has an unfair competitive advantage in the market.
• As a result, The Government placed a number of restrictions on NEST's operation to prevent employers from moving from existing pension schemes to NEST, and levelling down.

The State Aid conundrum

There is a concern that if the restrictions on NEST are lifted, it could mean the case for state aid would no longer meet the European Commission's (EC's) rules.

Although the report suggests that this should be possible, the case would still have to be put to the EC for consideration. This point was made by Steve Web in the evidence he made to the committee saying we "would have to make a strong case".

He also went on to say "unless we gather the evidence that something is different to the last time and unless we gather evidence that the market is failing in a way that we had not anticipated, we will not be able to change anything".

Why remove the restrictions now?

The case for removing the restrictions on NEST now are related to the success of automatic enrolment, its ability to repay the state aid, employer choice and consumer outcomes. For example, some think that the restrictions introduce complexity for employers when choosing an automatic scheme.

Others argue that the contribution cap could give the false impression that pensions savings up to this cap will provide an adequate level of retirement income.

Finally, if the NEST restrictions are removed now and if it gets more business as a result, it would mean that the state aid required could be managed better, and repaid earlier – a win/win situation for NEST and the taxpayers who support the state aid provided.

What happens next?

The Committee's report merely recommends that the NEST restrictions should be removed now.

If the Government agrees, they could introduce secondary legislation to do so - it would not require a further Pensions Act. This means that the entire process could happen relatively quickly, potentially during 2013.

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