Removing restrictions on national pensions scheme to boost take-up would be unlawful, Government says

Out-Law News | 06 Jun 2012 | 12:07 pm | 2 min. read

The Government will "reflect further" on calls to remove restrictions on a new national pension scheme. However, it would be unlawful for it to do so simply to increase participation, it has warned.

A report in March by the Work and Pensions Committee said that restrictions built into the National Employment Savings Trust (NEST) would have "unintended consequences". The Committee called for the Government to remove the cap on contributions built into the scheme, and ban from transferring in existing pension savings, as a "matter of urgency".

In its response to the report, the Government said that evidence that the restrictions were acting as a barrier to take-up of the scheme was "not unequivocal". EU rules prohibit state aid, or advantages granted by national governments to particular companies, unless it can be justified for general economic development reasons.

"The Government is conscious that the restrictions were designed to ensure NEST's focus remained on its target market," it said. "It would not be lawful for the Government to remove the restrictions simply to increase take-up of NEST – there would need to be evidence that such action is required to address market failure."

NEST is "one of many" schemes employers could choose to meet their new duties, the Government said, adding that employers should "consider fully" whether it is appropriate for their workforce. It was designed to be a low-cost, trust-based occupational pension scheme for people who were largely new to pension saving.

From October employers will have to start auto-enrolling their workers into NEST or their own occupational pension scheme providing that it meets minimum requirements. 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.

The Government is currently due to re-examine the restrictions placed on NEST after auto-enrolment has been fully implemented in 2017.

The Committee said in its report that the contributions cap put companies with higher-paid employees at a disadvantage. Allowing employees to pool together small pension pots they may have accrued in previous jobs would cut down on unnecessary administration charges, it added.

The Department for Work and Pensions (DWP) is due to publish its response to a consultation on allowing workers to consolidate small pension pots in the summer, and acknowledged that respondents had suggested NEST as a possible means of aggregating these.

The Government reiterated that it was not currently planning to allow early access to pension savings due to "limited evidence that early access would have a positive effect on overall pension contribution levels, or provide significant help to individuals facing financial hardship". However, it may decide to revisit this issue once automatic enrolment had been fully phased in.

It added that it welcomed efforts by the pension industry to improve transparency over charges and establish an industry-wide code of conduct. Industry body the National Association of Pension Funds (NAPF) plans to produce its code of conduct by late summer, with a view to full implementation in 2013.

"The Government has made clear that charges should not be excessive in relation to the services being provided," it said. "It will monitor charges throughout automatic enrolment to ensure that disproportionately high charges do not pose a risk to good member outcomes. If this proves to be the case, the Government will take action."

The Pensions Regulator could also take action where schemes are not offering value for money or being suitably transparent with regards to charges, it added.