My Lords, the amendment in my name and that of my noble friend Lord McAvoy would require the Government to lift the restrictions on the National Employment Savings Trust—or NEST, as it is commonly known—within one month of Royal Assent. This includes the ban on transfers and the contribution cap.
The Government’s decision not to lift the contributions limit and bulk transfer restrictions on NEST until April 2017 or to lift the ban on individual transfers in and out until October 2015 is cause for real concern. In his Written Statement of 26 September, the Minister said that,
“the European Commission has considered and approved the modifications to the State aid case for NEST”.—[Official Report, 26/9/14; col. WS 167.]
He can therefore see no barrier to lifting the restrictions that apply to NEST within the timescale set out in our amendment. Crucially, I believe it to be in the public interest for the Government to proceed in such a way.
I cannot understand why the Minister is so reluctant to lift the restrictions. I will highlight all the positive statements made by the noble Lord, Lord Freud, in support of NEST. The noble Lord, Lord Freud, said, in a Written Statement on 26 September, that NEST has proved its value. It now has more than 1.5 million scheme members and works with about 9,000 employers. That number is rising. NEST provides a quality, low-cost pension scheme targeted at low to moderate earners and small employers. Its public service obligation ensures that NEST makes sure all employers are able to engage with their automatic enrolment obligations. On 18 November, the Minister reminded us:
“From June 2015 1.2 million smaller employers—those with fewer than 50 workers—will start to engage with auto enrolment. NEST will be critical in ensuring that these small employers are able to access low-cost pension provision for their workers”.—[Official Report, 18/11/14; col. WS 13.]
I think that all sides of the House agree with the Minister on the crucial role NEST has to play in its target market, and with the evidence that it is performing very well.
It is worth expanding on the NEST success story. As the pensions industry acknowledges, NEST provides best practice standards, which have encouraged the insurance companies to improve their standards. It is low cost for employers and employees. It is simple and cheap to administer. It has high standards of governance. As NEST’s website proudly states, it has an “award-winning investment strategy”. Finally, NEST provides an excellent solution for employers with a high staff turnover, such as the catering and construction industries, because the pots remain and can be paid into by the next employer. Can the Minister confirm that he agrees with this analysis: that NEST has proved its effectiveness and worth? If he does, I fail to understand his reluctance to lift the restrictions.
I agree that there was a good case for having restrictions before it was clear how the market would progress, but these restrictions are no longer justified. The auto-enrolment market is now well under way and NEST has not taken all the business, which had been a concern among some. We should therefore examine the impact of failing to lift the restrictions and caps within one month of Royal Assent, as our amendment suggests. The restrictions to date have meant that NEST has been able to get less of that low and medium-earning pension than it otherwise would have done. If this continues, the effect would be to contribute to the increase in the number of small, dormant pension pots. It may also miss out on the benefits of scale. We debated that earlier.
Banning transfers in and out will be a problem for employers. The Department for Work and Pensions’ research found that more than 80% of employers want one provider. That makes sense: it reduces their administrative burden and means that they can provide their staff with pensions that are easier to understand. The ban means that employers who are thinking about using NEST but currently have a pension scheme of any type will be discouraged from using NEST because they cannot transfer in the pension assets in their current scheme. The Government purport to encourage employers to use NEST but, by refusing to lift the ban on transfers in and out right away, the effect is to discourage employers who currently have a scheme elsewhere.
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While the contribution limit will be lifted from 2017, retaining the income cap will discourage employers who have a broader salary range than low to middle income earners using NEST as they will have to administer two pension schemes. This may be a minority of employers, but it is an unnecessary restriction and one which we know employers will not like.
We conclude, regretfully, that NEST is being disadvantaged against many of its market competitors, and we cannot understand why the Minister is doing
this. The effect of the Government failing to lift the caps and restrictions in time for the remaining employers to establish auto-enrolment is to ensure that the restrictions on NEST remain until every employer has staged. Is it really the Government’s intention that by the time NEST restrictions are lifted auto-enrolment will be complete?
The Minister should consider also the public interest obligations of NEST and the subsidy that it receives from the taxpayer. First, the caps and restrictions mean that NEST is disadvantage in competing for many of the low and medium-earning savers for whom it is designed. That may well result in customer detriment for many of those workers. Secondly, the Government’s proposals fail the public interest test. If large numbers of low and medium-earning employees cannot use NEST, it is being prevented from delivering its public interest obligation. Thirdly, restricting NEST impacts on its financial position and makes it harder to pay back the state aid earlier which would allow it to reduce its charges even further. This again undermines NEST’s public interest obligation and its mission to deliver low-charge, high-return pension provision.
Finally, the rest of the industry is reported in the pensions press as increasingly not having the capacity or, possibly, the desire to cope with all the employers who are still to establish auto-enrolment. Smaller employers, often with low to medium-paid staff, are in this position. Having had, it is said, the advantage of the NEST restrictions in place while larger employers establish their auto-enrolment schemes, the big pension providers have recruited the profitable business. Perhaps the industry is less interested in the smaller end of the market, and thus the need for NEST is even greater.
I am sure that the Minister will be able to explain why the Government have so far refused to lift the restrictions. I urge him to accept the amendment. If he cannot do so today, I hope he will take it away and reconsider before Report the strong case for the restrictions to be lifted not in a few years’ time but before auto-enrolment is complete. I beg to move.