In its latest report, the Work and Pensions Committee urged the Government to introduce the necessary changes to the National Employment Savings Trust (NEST) "as a matter of urgency". There is a cap on annual contributions to NEST, and members cannot transfer existing savings into the scheme.
A Government call for evidence on whether the restrictions were influencing employers' choice of pension scheme "in a way that was not intended" closed at the end of January. In its own response (16-page / 97KB PDF), NEST described the restrictions as "detrimental to both employers and employees". A previous Committee report, published last year before automatic enrolment into pension schemes began, had recommended that the restrictions be lifted.
"Since auto-enrolment began, the case for lifting the restrictions has become even more powerful, and the need for action more pressing," said Dame Anne Begg, chair of the Committee. "For auto-enrolment to continue to work successfully, NEST must be allowed to thrive."
"The Government has already made clear that it will need to 'fix' the issue of transfers in and out of NEST if it wishes to implement its 'pot follows member' solution to the current problem of small pension pots. This makes the case even stronger for lifting the restrictions now. Auto-enrolment begins for medium and small employers from 2014. They will begin preparations a year to 18 months before then. Now is the time for action to be taken, it cannot wait until 2017," she said.
The Government announced in July last year that it would adopt a 'pot follows member' approach to consolidating workers' small pension pots as they moved from job to job. Subject to legislation, this model will automatically transfer savings under automatic enrolment schemes to a new employer's scheme when the worker changes job.
The report also called on the Government to establish under what circumstances the NEST scheme would breach European state aid rules. "It is important that the Government now makes it a priority to gain certainty on the state aid issue, to ensure that this is no longer perceived to be an obstacle to removing the restrictions," it said.
NEST was designed to be a low-cost, trust-based occupational pension scheme for people who were largely new to pension saving as a result of automatic enrolment. It has a public service obligation to ensure that everyone eligible for automatic enrolment can access a low-cost pension and has a particular focus on savers not well served by the existing market sure as low to moderate earners, those with smaller employers and firms with a high turnover of staff. The scheme is due to be reviewed in 2017.
The largest employers began automatically enrolling their workers into NEST, or into their own occupational pension schemes which meet minimum requirements, in October 2012. Smaller employers are set to follow in a staggered implementation programme, running until April 2017. Once the process begins, employers will be required to automatically enrol 'eligible jobholders' aged between 22 and the State pension age who are earning more than £7,475 a year.
According to the Committee's report, the annual cap on contributions is adding "complexity" to pension arrangements for both employers and employees. The cap, which is currently £4,400, means that employers may be unable to enrol their highest earning employees into NEST. As a result, employers will be likely to look for an alternative scheme which can accommodate all their staff but which may not be as good value, the report said.
"Employers want simplicity," said Begg. "They want to be able to choose one pension scheme to cover all their employees. The cap on annual contributions to NEST means that employers can't opt for NEST for their high-earners or if they want to make more generous contributions. So some employers are dismissing the NEST option and choosing a private pension provider who can offer a scheme for all their employees."
"NEST is required to be a low-cost scheme and to offer good value. Other pension providers don't have this same obligation. There is therefore a risk that the restrictions will mean some employees are prevented from having access to the best value pension scheme available," she said.
Pensions law expert Simon Tyler of Pinsent Masons, the law firm behind Out-Law.com, previously explained that NEST eligibility had initially been restricted to ease fears from existing pension providers over unfair competition.
"Pension providers were rightly nervous about the Government setting up a pension scheme in competition to their own offerings," he said in November. "However, the balance of opinion is moving from fears of unfair competition to ensuring that NEST can serve its purpose."