Are Insurers Feathering Their NEST?

September 9, 2014 David Piltz

The UK Pensions Minister, Steve Webb, has announced the government intends to remove the annual contribution limit and transfer restrictions it placed on the National Employment Savings Trust (NEST). While the annual contribution limit and bulk transfer restrictions will stay in place until 1 April 2017, the option to remove individual transfer restrictions from 1 October 2015 is to be retained. These shackles should not have been put on NEST in the first place, and the continuing delay in removing them is more down the diplomatic manoeuvrings of various pension providers than any logical argument, although Steve Webb has warned that lifting the restrictions before 2017 could see the government locked in an expensive and lengthy battle with insurers.

It is true NEST’s initial target market was those employees who were not well serviced by pension providers with shareholders to satisfy. However, to be successful, NEST needs volume of business and that means moving into the market that pension providers would like to view as their own. An insurer representative told the Work and Pensions Select Committee that “NEST was set-up because of a supply side failure”. This is insurer talk for “we want the nice juicy low-hanging fruit but not the costly cheaper stuff”. Pension providers were only prepared to service part of the market and NEST was set-up to deal with the bit those providers did not want.

However, they saw to it that shackles were placed on NEST to ensure it could not compete on a level playing field with pension providers for the bit of the market they wanted. The same representative said “We couldn’t supply a solution for everyone” by which they mean they did not want to provide a solution for everyone. But equally, pension providers did not want to lose the profitable clients to NEST. So the shackles were put in place and every effort made to retain them until the pension providers have the share of the market they want. According to the representative, only in 2017 would NEST have a track record such that the restrictions on it could be lifted.

The latest statement by Steve Webb records that NEST currently has over 1.5m scheme members and is working with 8,900 employers. That looks like a good track record to me. Albeit far too late, 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 government has fallen for the argument (technically correct) that no employer contributing at the minimum level will exceed the annual contribution limit before April 2017, when contributions under auto enrolment will rise to eight percent on a band of earnings. Thus, they say the restrictions will not bite before the shackles are removed, so there is no harm in leaving them in place until then. To that, I would say if you don’t expect the restrictions to ever bite, then there is no harm in removing them now. There are many employers paying more than the minimum level. Why should NEST not be an option for them?

The government is commencing a short technical consultation on the draft legislation. Why wait, Mr Webb, to 1 April 2017? Be brave, remove the shackles this autumn. The only downside in doing so is that pension providers might have to compete with NEST for the nice juicy clients now!

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