Connected Research

Union policy research in the 21st century

NEST charges set at 0.3%

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The DWP has confirmed the charging structure for NEST – the National Employment Savings Trust (the new name for the system of personal accounts being implemented from 2012). This has been welcomed by the Personal Accounts Delivery Authority.

The structure will have two components:

– an annual management charge, levied on the value of funds in the account, of 0.3%

– a 2% charge on contributions.

The latter is intended to be an interim measure intended to fund PADA’s start-up costs, after which time the charging structure is expected to fall away to leave only the 0.3% AMC. PADA has published an accompanying briefing note arguing that this structure meets the aims of the Turner Commission and that the twin element leaves median savers in the target group, even in the short-term, better off than with an AMC of 0.5%. Certainly it meets the government’s response to the Turner Commission, which centred on a belief that it was possible to achieve an AMC at a rate of 0.5% of funds invested in the short-term and below 0.3% in the long-term.

The PADA report also argues that such a charging structure is significantly lower than what most savers in the target group could currently achieve (not least in comparison with stakeholder pensions) and one comparable to that achieved by high earners and savers in large schemes. Clearly those in the scheme from the beginning will be faced with higher charges than those who come in later – and arguments have been raised that those saving for a short time before retirement are likely to be hit relatively highly by the charging structure (see BBC news report). Nevertheless, if PADA is right that such a structure is equivalent to a 0.5% AMC at the median, then such arguments do carry less weight (although PADA does acknowledge both situations in its report). It’s also true that those who are in the situation and with funds less than, currently £17,500 may also benefit from the trivial commutation rules.

The impact of a low charging regime on pensions in payment under the scheme is key, as David Pitt-Watson’s RSA report recently explained, and its achievement in this context will help NEST achieve its main objective in addressing the problem of under-saving for retirement amongst low to moderate earners. (Pitt-Watson repeated this point at the recent launch of the Unions21 report Tomorrow’s Pensions.) Figure 3 of the PADA report also highlights the impact of high charges on the overall pension pot – in particular for those switching between schemes.

So – another welcome step along the road to the establishment of NEST. Nevertheless, it is somewhat worrying that research continues to highlight that a higher proportion of those in the key target group are likely to opt out of auto enrolment in workplace saving – up to 40% of low-paid workers on less than £15,000. Clearly auto enrolment and NEST are different concepts – up to the point that auto-enrolment in companies that do not currently offer a scheme is likely to conclude in enrolment in NEST. Political uncertainty over the future of NEST cannot help, and it is clear that there is a level of confusion – backed up by misinformation, some of it deliberate – out there which precludes a more positive reaction at this stage.

As part of the education campaign for which Hymans Robertson is also calling, there is a need for clear, explicit and punchy arguments of the merits of workplace savings, not least in NEST. Here’s my starter for five:

1. a 4% personal contribution triggers an additional 1% from HMRC and, more importantly, 3% from the employer: a doubling of your savings at no cost to yourself. And it’s part of your pay, just deferred until you retire.

2. workplace saving is an easy way to start to save, and then to keep doing so, since the money comes straight from your wage packet

3. the state benefits on which you might now be relying to save you from poverty in retirement may not be there when you get to retire, or they might not be worth what they are now

4. low charges in NEST means more of your savings go to fund your pension pot

5. decent flexibility: you can change your contributions whenever you want and, once you reach 55, you can get at your funds whenever you want.

Any others?

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Written by Calvin

16/03/2010 at 6:11 pm

Posted in Pensions

Tagged with , ,

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