The dumbing down of choice
I went to a talk yesterday by a former shadow cabinet minister of state for the DWP. It was under Chatham House rules so I can’t tell you which one – it doesn’t matter which one – it matters that it was a senior politician who is considered brainy.
He talked openly of his admiration for auto-enrolment and the success of NEST. I asked him how an organisation with an operating deficit of c£500m accumulated in 7 years could be considered a success.
It would seem that in his head the success of NEST and auto-enrolment are one, the £500m is a premium paid by the taxpayer to ensure a change in the savings habits of the nation. If this were the case, he could justify that sum, not by its spending – but by its outcomes.
It is not the case.
The true heroes of AE are not in Westminster
This confusion between NEST and auto-enrolment is not helpful – not helpful at all. Auto-enrolment is a means to improve savings rate and democratise the workplace savings process, NEST is one of the reasons it has been a success but NEST is not auto-enrolment.
The politician is not alone in this; I have spoken to senior economic journalist – including the then economics editor of the BBC, who were under the same delusion.
The Government is of course quite happy it be perpetuated. NEST is the Government’s scheme, Auto-Enrolment is a Government policy success – why not take the glory if you’re banking trophies?
The answer is because the success of auto-enrolment is not down to policy or to NEST but down to the half million employers who have staged and are operating compliantly. It’s down to the many workplace pension providers offering capacity and innovation to the market and it’s down to the business advisers, payroll bureaux and financial advisers who are averting a capacity crunch.
Choice matters!
The failure to differentiate between AE and NEST within Government circles is serious. NEST needs to be accountable on a number of levels, not least to the tax-payer. It cannot be waved through the strictures of Pensions Act 2017 in a chauffeured limousine. It cannot be promoted primum inter pares on tPR communications to employers and it cannot be given favoured nation status at PLSA conferences!
NEST is a choice, often a good choice but one of many. As the illustrations at the top and tail of this blog show, NEST now promotes itself as the “feel good” option, Bright Pay now present NEST as a kind of kettle which can be plugged into payroll without a moment’s thought. This would be fine if we were buying accountancy software, but we’re not.
Employers are buying a workplace pension scheme for their staff. This will be funded with real money that might otherwise have been paid to staff as wage increases. These workplace pension choices are too important to be dumbed down like this.
The DWP may argue that “no one can be blamed for choosing NEST” but that has yet to be proved. The threat to employers selecting NEST without due consideration for alternatives has yet to be tested, it will come through class action lawyers not from the Pensions Regulator. The threat may not even be as a result of perceived or real failure by NEST but because of failures by employers to demonstrate they acted for their employees in the selection of the workplace pension.
I am not scare-mongering, this is precisely the litigation that is being levelled in the states against employers who cannot evidence due diligence on the choice of 401k, it is why the banks cannot defend claims against them from the mis-selling of PPI.
Choice matters – not just in terms of outcomes – but in terms of liability. Employers who don’t choose but simply default into NEST (as the Government Scheme) are taking unnecessary risks not just with their employee’s savings, but with their reputation and ultimately with their businesses.
The same risks are being taken by business advisers who coral employers into NEST (or any other scheme) without requiring due diligence on the employer’s choice.
The distortion of choice
The debate as the PLSA was having it, was on the future of auto-enrolment. It turned into a debate on the future of NEST. That is because NEST is being confused with auto-enrolment.
But there are many choices available to employers other than NEST and in many if not most cases, those choices make sense. To make sense of choice you need due diligence and that is what organisations like pension playpen aim to do.
But the agenda is set against choice by the massive loan to NEST which allows NEST to offer services at below cost-price and write off development costs against either the tax-payer or a future generation of savers. The debt that NEST has run up is huge and it is real money. It is being used to subsidise NEST’s employers costs to the detriment and distortion of choice.
I see NEST’s complicity in allowing myths about itself to perpetuate as gross mis-selling. We need the matters raised in this and previous blogs (here and here) to be properly debated.
When I asked the former DWP shadow minister whether such a debate would happen, he told me there would be no political appetite for it. That was a dreadful thing for a democrat to say.
Workplace pensions sold like kettles
Totally agree with this. If an employer cannot show that an effort was made to investigate all options available to them before choosing any scheme then the employees may have a claim against them. They may not be eligible for other choices, and may have good reason to select NEST rather than NOW or Peoples Pension. But these reasons will need to be documented to show they had been considered and discounted
Certainly, financial advisers regulated and authorised by FCA must evidence their reasons for recommendation of an AE pension solution. Clearly, if a larger employer was not using an advisor, it would be prudent (and likely required by their internal procedures) to undertake appropriate research as employee expectations, public image and due dilligence/governance expectations will be higher. But consider small businesses on a budget that lack resources, and who have never had a pension scheme previously, with small numbers of employees who are on modest salaries. These may well opt for NEST as their AE provider with little or no formal research or documented audit trail. Consider that, regardless of any views we may all have, we are all aware that NEST is the only scheme that is a public service AE solution, that is under an obligation to accept all employers, and is backed by the Government. Providing the employer is meeting their statutory duties for AE, why do you feel that such firms NEED to document their selection process, and on what basis do you feel employers would realistically be at risk from an employee claim for choosing NEST?
Thanks Darren, neatly put ! The problem is wider- there are more providers than just NEST, NOW and People’s – we need a system that creates due diligence accross the market – so that employers can be seen to have made the decision with the best interests of members (without breaking the bank). Such systems are available though not widely publicised!
Good article Henry. I do feel however that the manner in which BrightPay NEST API image is being taken out of context by you. BrightPay promotes the ease of use with NEST through its API in the same way that we will promote that same ease of use with any other AE provider. We have a similar API with Smart Pension and we are awaiting for other APIs to become available. To suggest that we are selling workplace pensions “like kettles” is misleading.
I’m a bit miffed by you BrightPay guys – I think you could and should do more to promote choice! It’s not like I haven’t reached out!
BrightPay caters for 17 AE schemes either via API or CSV. We also include various articles and blogs on our website in relation to choosing a pension scheme and the importance of getting it right. At the end of the day we sell and support payroll software. It is difficult for us to stray in to matters properly dealt with by IFAs and accountants. We could come across as butting in where we’re not wanted! Having said that, we’re always happy to keep this under review.
Paul, we think there’s a need for due diligence in the choice of pensions! I’ve had numerous conversations with your organisation about choice and would be happy to have another!
Henry, glad to have another conversation and I will contact you later this week.
I would be interested to see your reply to Richard’s post as this would be key to the many small to micro employers yet to stage. Also, I note that you did not include payroll software companies as one of the heroes in your article. Many times our support department has been kept busy supporting employers with AE alone! Payroll software plays a huge part in averting the so called capacity crunch!!
Henry, great to see someone other than IFA’s pointing out the dangers of not seeking Inependent Advice. I have come accross numerous accountants and bookeepers simply defaulting to NEST and many clients who have subsequently saught advice because of this. Interesting that they don’t trust their advice it would seem!
Richard, I have a very high regard for the people who create payroll software and those who market it! We work with a number of companies who compete against each other and I really don’t want to get into heroes and villain conversations. To me – the heroes (as far as auto-enrolment goes, are those who are interested in keeping employers happy and helping members get good outcomes. There are ways to support employers beyond compliance with AE regs! These pensions aren’t just dead money – they’re deferred pay!
I don’t disagree Henry – please don’t misunderstand me here. I agree with all comments relating to best practice, best outcome, and what a good employer should do, including taking independent advice. No one disagrees that a good employer should be expected to go further than just meeting statutory obligations – they should regard AE as an opportunity to enhance their relationship with employees etc.
But my post responded (I hope dispassionately and objectively) to a post referring to what employer’s ‘need’ to do, and their risk of being subject to legal claim by employee’s. I specifically distinguished between reasonable expectations and wider responsibilities of larger employers, and smaller employers with limited resource who might select NEST without any substantive research. For the latter I simply cannot see how these small employers could be at legal risk of a claim for selecting NEST.
I certainly don’t feel the reference to the US on 401K’s is an appropriate comparison – their law and legal processes are shall we say somewhat ‘different’ to the UK. In addition, and as far as I’m aware, there is no single US Government sponsored 401K, and 401K’s are not a mandatory requirement.
Henry, well said. Pensions people know that NEST is not AE, but few are prepared to say it loudly. And that debt will never be repaid. Clearly.
Thanks Chris – you mean the debt outstanding to the tax-payer or the debt we owe NEST? I was shocked to see just how much NEST was spending at PLSA – it does not seem to be where the money should be spent. Infact I’d prefer it if NEST stopped spending money on promotion altogether.
Richard – thanks to your thoughtful post; conditions in the States are different and commercial litigation more a threat than here (at least for now). that 401k (and AE is for the employer) works against your argument. In the UK all employers have to follow AE rules which include “choosing a pension (IT’S THE LAW!). Which makes litigation against small employers who don’t choose but have a pension chosen for them, the more vulnerable.
As for NEST and the reasonable expectations of employees of small employers, I know how reasonable expectations jump when there’s the possibility of a claim! I was on the wrong end of claims from previously happy clients who sued me over pension transfers. It’s amazing how quickly the ground moves (PPI being the obvious comparator).
The cost of doing the due diligence before choosing NEST is tiny, if the due diligence shows the workforce isn’t NEST compatible (too old, too well paid or too sophisticated) a small amount spent on due diligence can avert a lot of problems later.
I don’t want to sound a scaremongerer, but if I’d done the documentation , I would have future-proofed myself on pension transfers. I didn’t and I lost out, I am saying the same to employers, accountants, IFAs and payroll bureaux.
DO YOUR DUE DILIGENCE -EVEN IF YOU END UP CHOOSING NEST AS A RESULT-IT IS THE RIGHT THING TO DO AND YOUR BEST INSURANCE FOR THE FUTURE
But the employer is choosing a pension Henry – they are choosing NEST even if they are choosing this from a list of one. I’m unclear as to why you feel my reference to 401K goes against my argument as the point here is that AE is statutory and the UK Government has provided its backing to a particular AE solution. If ever there arose a successful legal case from employees against their employer for selecting NEST, the repercussions for the Government could be both embarrassing & devastating as it would effectively be saying that NEST is not fit for purpose.
However, I completely agree that it would be prudent for any employer to do due diligence and retain an audit trail of their selection process to avoid such a potential risk, regardless of how unlikely such an occurrence might be.
There is no backing from NEST in statute- there is only a £600m loan from the tax-payer which must be repaid. That in itself is a worry – how is it going to be repaid and what are the repercussions for the employers who choose NEST. It is all very well the DWP saying that no-one could be criticised for choosing NEST – that is not for them to say!
The Government is creating false certainty around NEST and this was not the intention of offering choice. If you offer choice, you need to be sure that there is a market (there is) and there needs to be a way of making informed choice (there is). Then – if you are a responsible Government, you promote the market – of which NEST is one player, you do not distort the market as the Government is in danger of doing.
NEST may be appropriate for many BUT it is not a default option. Failure to contrast and compared this option against others exposes employers to risk and will make it a very easy task for those who will seek to obtain compensation from them and lets face it, the sums involved in auto enrolment will make PPI look like loose change!
I ask my clients two questions:
1) Do you care about your employees and their financial welfare?
2) Would you spend 8% of your payroll on any other purchase without first investigating what you are buying and the alternative options?
There are numerous options available to employers who take he time to look either directly or using the services as provided by advisers.
The Government needs as many Employers and their employees in NEST, simply to try and repay the huge loan due and if I remember correctly to try and deal with the 1.8% contribution that was initially ‘only’ going to be for a 20 year period or less, depending on when NEST becomes ‘solvent’! The Government requires as many promoters of NEST as possible. I have advised many of my clients on auto enrolment and my due diligence and recommendations see NEST as one of 5-6 real life choices, as cost is of primary importance for most small businesses. Most auto enrolment providers have priced themselves out of the pockets of small employers. NEST are really only my default option if there is a strong likelihood of opt-outs and apathy in the various workplaces. To have a paper trail is important and a recommendation taking into account the business circumstances may potentially save a lot of future hassle.
It will be an interesting few years from April 2019 onwards when the collective 8% contribution has to be paid between Employer and Employee, as I am adamant this will see many lower paid employees simply opting out due to affordability. It would then take a very brave, or very stupid government to enforce compulsory pensions.
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I don’t want to sound a scaremongerer, but if I’d done the documentation , I would have future-proofed myself on pension transfers.
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I don’t want to sound a scaremongerer, but if I’d done the documentation , I would have future-proofed myself on pension transfers.