“The best way forward or the NEST way forward?”

If you are an employer and you have made a decision, there is no liability—that is clear in the legislation. If you have decided to go with NEST rather than NOW: or People’s, there is no liability that can fall on you as an employer”.

Charlotte Clark . head of private pension strategy-DWP

The Department have stated unambiguously that employers are not liable for their choice of AE pension scheme. Legal experts, however, have told us there could be grounds for legal action if employers cannot demonstrate due diligence. -Frank Field- Chair of DWP Select Committee

Every day we get employers coming to www.pensionplaypen.com who have been told to use NEST. It is what the head of DWP’s private pension strategy team considers the safe option, it is “the Government Scheme” and it has already consumed some £460m of public money becoming what it is?

But what is NEST?

Is NEST the default option? Do employers who cannot make a choice find themselves in NEST? No they don’t.

Is NEST a safe harbour? Nowhere in legislation is there a statement that backs up what Charlotte Clark claims. Safe is not a safe harbour.

Is NEST the best pension, only time will tell, but NEST has some very distinct features that could make it better or worse than its rivals.

Compulsory Restrictions that make it different

NEST currently runs under a number of compulsory restrictions. It has had to adjust its charging structure from the mono-charge that prevailed since the introduction of stakeholder pensions. This was to satisfy the EU that it had a means to pay back its debt to the tax-payer and was not operating under an unfair competitive advantage.

Similarly, for the early years of its existence (and until April 2017), NEST has operated a no transfers in/no transfers out policy. It cannot take more than £4,900 in total contributions per member, per year.


Voluntary quirks that make it different

NEST operates a number of its services in a very non-consensual way.

  1. It’s default investment strategy is designed to dampen volatility for those with many years to retirement. This also dampens potential growth for youngsters. This reverse lifestyle is justified on a behavioural basis, it is assumed that were youngsters to find out their investments were volatile, they would give up on NEST, pension saving and go and do something different instead
  2. It does not have discretionary death benefits, so if you die with a NEST pot and have a reasonable amount of estate, your beneficiaries will pay IHT on your NEST pot, this would not be the case if you were in the usual discretionary trust operated by NEST’s rivals.
  3. NEST has chosen to be a relief at source and not a net pay scheme. By and large this favours those contributing on low earnings but is not as good for those on high earnings. Other mastertrusts (People’s and Supertrust) give employers the choice of tax regime and even the opportunity to split schemes.
  4. NEST deliberately operates a low-touch , hi-tech, member and employer support centre. It prides itself (rightly) in having extremely user-friendly self service support facilities. While this is laudable, it doesn’t suit all employers and employees. (see Pension PlayPen support surveys passim)
  5.  Nest (unlike some rivals)  will not (for money laundering reasons) accept employers with a non-UK bank account. This has been an issue for a number of employers with workers based in the UK but who have an overseas HQ . Employers in Ireland (with workers in Northern Ireland) and employers with off shore payrolls are typical of organisations which struggle to use Nest (thanks Kate Upcraft for this).

The general point is the same, all these distinguishing features are sensible and define NEST as “something different”. But they don’t necessarily make NEST better, NEST is right for a lot of employers but there are many employers for whom NEST is not right.

To argue as the DWP does that there can be no liability if an employer decides to go to NEST has no justification either in a legal or in common sense. 


Employer liability

In a very narrow sense, Charlotte Clark may be right, it is hard to see the Pension Regulator suing an employer for using NEST. But regulatory fines are only one part of the equation. Here’s a quick list of the potential litigants that could go to court against an employer over the choice of NEST

  • the employee claiming NEST was inappropriate for his or her needs
  • the employees as a class – claiming the employer failed to conduct due diligence
  • an employee’s representative – a union – acting on behalf of employees accross a group of employers
  • a purchaser of the business who has been given warranties that the workplace pension was chosen properly

To suppose that these risks are groundless is to ignore the evidence in the USA and other countries where just such litigation is happening today.

Employers face impairment in the value of their business , should litigation commence and they will suffer if employees feel aggrieved.

As for business advisers, while they cannot be sued by the Regulator for advice to use NEST, they should be heedful of the former Pension Minister who pointed out the DWP Select Committee that

anyone advising an employer would “be ill-advised” to formally recommend a scheme.

(Pension PlayPen doesn’t tell employers what to do, we help employers make and document their informed choice).


Commercial arguments that need to be thought about

If you had a choice between investing in an enterprise carrying £460m of repayable debt or one without, you would choose the

debt-free enterprise, purely on the grounds that the debt would need to be repaid before you saw your money back or earned any dividends.

There is a pervading argument that NEST’s debt doesn’t matter, that it is public money and that that money can be written off. I do not buy that argument, nor should Britain.

NEST has set its stall out as a commercial alternative to NOW, Peoples Pension and other workplace pensions and it has received grants (in addition to the debt) to meet its public service obligation.

There exists within NEST’s terms and conditions the right to take money from employers where NEST is unable to manage the relationship commercially without a fee. Employers entering NEST on the basis that “NEST is free” are being naive, uncommercial and if that is what they are being advised, we suggest they speak to their advisers about what they mean.

NEST is currently free to employers, but there is no certainty it will remain so. There is no plan to write off the debt and the National Audit Office are pressing NEST for a commercial plan that shows how it intends to repay the debt to the taxpayer.


Competitive arguments

Monopolies, especially Government monopolies are not seen – in our capitalist world as a good thing. There are some of my friends and colleagues who see the world through another lens and think that NEST should be a state monopoly but they are not democratically elected to decide on policy. Policy has been made in this country by those who were elected and that policy says that employers are required to choose a pension.

As a result of that requirement to choose, new providers came into the market and old ones stayed as workplace pension providers.

They are there to provide something different from NEST and they do.

They are there to be innovative and they are

They are there to keep NEST on its toes and they have.

Finally, they are there either to make their shareholders a profit or to deliver mutual benefits to all involved in the enterprise that supports the workplace pension. This they may or may not do.

To a large extent the capacity of those running non-Governmental pensions (without Government subsidy) depends on their being able to compete in an open market and not in a market skewed towards the Government Pension.


People’s rights

Finally there is a philosophical argument around choice. When Auto-Enrolment was first proposed, many of the decision makers in the DWP wanted there to be only one auto-enrolment pension- NEST.

I remember speaking to Hugh Pym, then chief economic reporter for the BBC in 2012 and him telling me his understanding was the only pension you could auto-enrol into was NEST.

The public often confuse auto-enrolment and NEST to the point that the DWP’s original vision has become self-fulfilling. It is true, many small firms are using NEST as their workplace pension provider for auto-enrolment.

But a very large number are choosing not to use NEST for a whole load of reasons.

  • Some take a very reasoned approach and choose another provider as better for their staff and their business
  • Others take an unreasoned approach and reject the idea of investing in a Government backed enterprise.
  • Others are ushered into other pensions by those with alliances with other providers

Whatever the reason for not choosing NEST, those who do, should not be told that they have created more liability for their businesses by doing so.

They are simply exercising their right to choose. A right that has been granted democratically by act of parliament and a right that should not be curtailed by the DWP.


Engagement

It’s common sense that to make auto-enrolment to work over time, we need to get contribution levels up. It’s common sense that people will only accept more and more of their salary being siphoned into a workplace pension, if they trust that workplace pension.

The workplace pension is not chosen by the employee (whose money is invested) but by the employer. If the employer chooses NEST because he’s told it’s “no-risk” by his accountant or the Government, he hasn’t engaged in the positive aspects of saving for the future.

The employer will have trouble explaining why he chose NEST to staff and staff will have trouble working out why they should bother with this NEST pension about which the boss hasn’t a clue.

Employers are asked to choose a pension, not in a random way, nor on the basis of it being “no-risk” but as a fiduciary, acting in the best interests of staff. The DWP position is antithetical to engagement , it encourages employers to disengage with the workplace pension.

Whether this is out of blind loyalty to NEST or because the DWP is more interested in compliance than outcomes I don’t know, but either way, there is no tenable argument for dumbing down the employer’s decision in the way the DWP is doing.


A call to action to the DWP

Whether on philosophic grounds, commercial grounds, competitive grounds or purely on grounds of suitability, employers have the right to choose a pension. Not only have they the duty to choose a pension.

Though legislation does not say this, it is expected of employers – there being no reason why they wouldn’t – that they should try to choose the best pension for their staff and their business. This is because we regard the employer as having a fiduciary care of staff which extends to things such as staff welfare in the workplace, compliance with wage legislation, the collection of income tax and a host of other employer duties we could call “fiduciary”.

I have no idea why the DWP want to promote NEST as they are doing. I think it is wrong of them and I think the DWP Select Committee think so too.

Frank Field concludes the section of his Select Committee’s recent report with a call to action for the DWP,

We recommend DWP use their response to this report to make a clear and comprehensive statement about an employer’s potential liability. DWP should also confirm where liability will fall if a scheme performs badly or fails. This would provide reassurance to small and micro-employers choosing a scheme.

We hope that the new Pension Minister Richard Harrington is making that a priority and that he is shown this article as an argument for the promotion of choice in a more reasoned way.

harrington

Richard Harrington – the new Pension Minister

 

About henry tapper

Founder of the Pension PlayPen, Director of First Actuarial, partner of Stella, father of Olly . I am the Pension Plowman
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2 Responses to “The best way forward or the NEST way forward?”

  1. Kate upcraft says:

    The other distinguishing factor about Nest is that it cannot accept employers with a non Uk bank account. This has been an issue for a number of employers with workers based in the UK but who have an overseas HQ who are doing the right thing and trying to find a workplace pension for their staff. This hits home hardest if you spend time in Northern Irelsnd as I do where many employers from Ireland have employees for whom Nest is not an option

  2. Mike Lacey says:

    Maybe I’m being uber cynical, but when I read “If you have decided to go with NEST rather than NOW: or People’s, there is no liability that can fall on you as an employer”. it sounds to me as if Charlotte Clarke is implying you could have a liability if you go to NOW or People’s Pension…

    I’m sure some people will read it that way…

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