Congratulations Nest on your millionth pension investor. Now what about a set date for ending that confusing 1.8% contribution charge?

3rd April 2014

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John Lappin looks at a state backed pension scheme that can only grow in importance but suggests one thing blots its copy book.

A pension scheme that you are probably starting to become familiar with reached a rather spectacular one million members this week. Everyone, and not just those million members, should be congratulating Nest – or the National Employment Savings Trust as it is known, on its success. Amongst other things, a huge number of people who were not contributing to a company pension are now doing so and Nest is an important part of that infrastructure.

Nest is a scheme set up with substantial government loans to do a lot of the heavy lifting of auto-enrolment as the workpalce pension reforms are known. Whereas private sector schemes can pick and choose the workplace pension schemes they decide to accept, Nest has what is known as a public service obligation. It must accept all other schemes. In other words, if an employer can’t find a scheme, it is the “port in the storm” that has to accept their pension scheme.

In the early days, many people thought that Nest would fall over given the strain. So far, it hasn’t and is now managing money for a huge numbe.r of people and indeed a sizable number of employers.

However there remains one significant anomaly (at least in the opinion of Mindful Money). Nest charges what is admittedly an extremely competitive annual management charge of 0.3%.

A further contribution charge of 1.8% is justified by the fact Nest borrowed money off the government to set itself up, which under European law it must pay back.

Eventually, though we are not told when, this contribution charge will cease to be levied.

Other pension schemes are going to be required to cap their charges at 0.75 per cent from next year 2015 certainly for their default funds with only a few exceptions. This makes sense.

The fact that people are auto-enrolling, i.e. they are in the pension scheme unless they actively decide to opt out, means that they shouldn’t be expect to be auto-enrolled into a high charging contract (Sophisticated investors need to consider carefully whether they might want to pay more for a non-default fund, that might seem riskier but could bring higher returns but that is an issue for another day).

But the fact remains that for older members of pension schemes, i.e. those near retirement, who may be in Nest, it is quite likely there average charge is much higher.

The Department for Work and Pensions, when it published its price cap documents, ran the numbers and said it believed contribution charges came in under the cap in most cases.

For older workers we are not so sure. We also think that a contribution cap muddies the water significantly. Indeed this is a view echoed by Dr Ros Altmann and concerns have also been raised by the Pensions Policy Institute.

So here is a suggestion. As Nest congratulates itself on its millionth member we should congratulate the organisation too. Well done Nest. But we think it should also aim to have done away with the confusing contribution charge by the time other schemes have to adhere to the price cap. That is April next year. Charges like its contribution charge, which will run for an unspecified period of time, really ought to be a thing of the past in the world of pensions.

Nest is leading the way in many things. It should lead the way on this too.image001

1 thought on “Congratulations Nest on your millionth pension investor. Now what about a set date for ending that confusing 1.8% contribution charge?”

  1. Heather Tilston from NEST says:

    Thanks John for a great piece! Just to be clear – for most members, the 1.8 per cent charge on contributions as they are made, combined with the 0.3 per cent annual charge on the total savings pot, averages out at equivalent to an 0.5 per cent annual charge, or less, over time.
    It’s possible that older workers may pay a slightly higher charge – assuming they only stay in NEST for a very short period. However, pensions are a long-term savings product. If somebody joins NEST at 55, or even 60, they could have well over 10 years of saving to look forward to. And with the recent changes to how people access their savings at retirement many older workers may stay invested with schemes like NEST for even longer.
    What’s important is that older workers are not put off pension saving. If they opt out of automatic enrolment, whichever scheme their employer uses, they risk turning down employer contributions and tax relief, which can double the value of their contribution. Many of them will be able to take the entire pot as a cash lump sum when they do decide to retire, if they want to. For information on NEST, visit our website http://www.nestpensions.org.uk

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