I am pleased to announce that later today the Government will publish their response to the call for evidence on the impact of the annual contribution limit and transfer restrictions on the National Employment Savings Trust (NEST).
Automatic enrolment into workplace pensions represents a step change in the pensions landscape. A crucial part of the automatic enrolment landscape is NEST which was set up by Government to ensure all employers have access to a high-quality, low-cost option for workplace pension provision. While the market has always provided for larger firms and higher earners, NEST was created specifically to ensure that smaller firms and low to moderate earners also have access to quality pension provision.
To ensure that NEST focused on this “target market” the previous Government legislated to constrain NEST in two particular ways—an annual contribution limit, currently £4,500 a year, and restrictions on transfers in and out of NEST, which prevents bulk transfers of existing schemes and limits transfers by individual scheme members.
In summer 2010 the Department for Work and Pensions commissioned an independent review—“Making automatic enrolment work”—to consider whether the framework for automatic enrolment was fit for purpose. The review concluded that the basic architecture, including NEST, was appropriate, but that the constraints on NEST should be lifted in 2017.
More recently the Work and Pensions Select Committee recommended in 2012 that the constraints should be lifted at once, expressing concern that some firms might not be able to use NEST, resulting in consumer detriment. Government responded in late 2012 with their call for evidence to seek views on the future of the NEST constraints.
Requiring NEST to focus on this target market has been very successful. As a large number of medium and smaller firms will start enrolling their workers in the next few years, now is the time to focus on helping these firms get ready. With its special focus on those workers with lower earnings, NEST will be a key part of the solution as it has thought hard about its design; it has aimed its research, communications, use of language, investment and decumulation strategies at its target market. It is working, and we need this to continue. Therefore, to make sure we achieve our aim of getting people saving, we have decided that NEST must continue to focus on its target group without any distractions.
The responses to the call for evidence revealed a perception that the restrictions placed on NEST prevent it from serving the low to moderate earners and smaller employers it was intended for. The reality is quite the opposite. With mandatory contributions of just 2% on a band of earnings, with at least 1% from firms, no employer contributing at this level or the full 8% will exceed the annual contribution limit.
However, we need to look to the future and ensure NEST remains influential in the marketplace, by continuing to help drive up standards and best practice. The minimum contribution will rise to a combined contribution of 5% from October 2017 and 8% from October 2018. Therefore, in line with the recommendations of the independent “Making automatic enrolment work” review, I intend to legislate as soon as parliamentary time allows to lift the contribution limit from 2017. This will give employers the certainty they need that NEST will continue to be an appropriate scheme for them and their workers when minimum contributions rise, or should they choose to contribute more.
With regard to individual transfers, we agree that NEST should be part of the automatic transfer solution for which we are currently legislating. Therefore we intend to lift the restrictions on individual transfers in and out of NEST to coincide with the start of the “pot-follows-member” regime. The ban on bulk transfers will remain in place until the end of the main roll out period for automatic enrolment in April 2017, when it will then be lifted.
We believe that the creation of NEST has played a crucial role in the early success of automatic enrolment. NEST has focused on its target market and has innovated to serve the needs of those in that market. As automatic enrolment moves on to cover medium and smaller firms we want NEST to continue its excellent work, while signalling now that beyond 2017 NEST will be put on a similar footing to other providers in the wider pensions market.
The Government response document will be available on the gov.uk website later today (https://www.gov.uk/government/publications), and I shall place copies in the Libraries of both Houses.