Pensions issue is a 'timebomb'

Apr 20 2010 by Sarah Green, The Journal

WITH an ageing population, pensions are a timebomb which needs to be tackled.

The National Employment Savings Trust (Nest) will be introduced in 2012 as part of a plan to secure a wider take-up of pensions among 11.7m workers in the private sector – a principle the CBI supports.

Employees will 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.

However CBI has concerns that the Government’s new workplace pension scheme could deter millions of savers because of its high and complicated charges.

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

Increasing pension saving will be potentially 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 lower average charges.

This may prompt many, who will only save for a few years in Nest, to think they are getting a poor deal. They may opt out, leaving lower pensions and defeating the Government’s aim of boosting saving for retirement.

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.

Even a relatively high AMC of 0.6% – a rate which is available to many firms – will be more attractive than Nest for the first six years.

Nest is a cheaper option over longer time frames, 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 unwilling to trust that the scheme will stay in place for two decades. It is meant to be low-cost and easy to understand, so it spurs people to start saving. But the risk is that many staff will quit the Nest scheme.

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

The next government needs to revisit the structure of these fees.

Sarah Green, regional director, CBI North East