Appendix: Government response |
The Government welcomes the Eighth Report of the
Work and Pensions Select Committee (Session 2010-12) on automatic
enrolment in workplace pensions and the National Employment Savings
People are living longer and not saving enough to
deliver the pension income they are likely to want or expect in
retirement. That is why the Government is introducing automatic
enrolment to encourage and enable people to save more.
Starting in October 2012, employers will have new
duties to automatically enrol eligible workers into a workplace
pension and to make a minimum contribution. NEST (National Employment
Savings Trust) is one of the schemes employers can choose to meet
their new duties. It is a low-cost, trust-based, occupational
pension scheme and is designed for people who are largely new
to pension saving.
Automatic enrolment will be rolled out gradually
starting with larger employers. The new duties will not apply
to small employers (those with fewer than 50 employees) until
June 2015 at the earliest. The minimum level of contribution will
also be phased in to help employers and individuals adjust to
the additional costs of the reforms.
Automatic enrolment in workplace pensions will lead
to major changes in saving behaviour. The Department for Work
and Pensions (the Department) is leading the reform programme
and The Pensions Regulator is responsible for ensuring that employers
are aware of their duties and comply with them. The Department
and The Pensions Regulator will monitor implementation and will
respond swiftly where necessary.
Conclusions and recommendations
INCREASING PARTICIPATION IN PENSION SAVING
[Paragraph 18] We welcome the decision by successive
governments to pursue auto-enrolment in order to address the steady
decline in pension saving. The policy has been designed to encourage
high levels of participation in workplace pension saving, whilst
retaining an individual's freedom to opt out. The recommendations
contained in our report are intended to support the successful
implementation of auto-enrolment.
The Government welcomes the Committee's support.
[Paragraph 25] Retirement saving through auto-enrolment
may be even more attractive to individuals if it offered additional
financial incentives or flexibilities. We welcome the Minister's
willingness to look at this again. In its review of auto-enrolment
scheduled for 2017, the Government should consider the advantages
and disadvantages, including the legal implications, of enabling
individuals to withdraw pension savings to buy a first home. The
New Zealand experience may offer evidence on the extent to which
savers' behaviour has been affected by this aspect of the KiwiSaver
The Government completed a call for evidence in February
2011 on the potential to allow individuals early access to pension
savings, and whether this flexibility may encourage more pension
From the evidence received, the Government concluded
that early access to pension savings should not be considered
at the present time since there is limited evidence that early
access would have a positive effect on overall pension contribution
levels, or provide significant help to individuals facing financial
hardship. There was also a broad consensus that the extensive
private pension reforms already planned, most notably the introduction
of automatic enrolment, should be implemented before the Government
considers further reform.
However, the Government confirmed that, once automatic
enrolment had been fully phased in, it would carry out research
into the reasons why some people decide to opt out. If this research
reveals evidence that access to pension savings is a significant
factor, the Government may decide to revisit the issue of early
access to pensions.
[Paragraph 30] The current State Pension system,
with its means-tested Pension Credit top-ups, may act as a disincentive
to some individuals on lower incomes who are considering workplace
pension saving. The Government's plans to reform the State Pension
and reduce means-testing are therefore welcome, and essential
in creating a simpler foundation pension which will enable people
to increase their retirement saving with confidence that they
will not be penalised by losing state benefits.
[Paragraph 31] The Government must set out its
detailed plans for State Pension reform as a matter of urgency.
Individuals need certainty on the Government's plans if they are
to make informed decisions about their retirement saving and whether
to remain enrolled in their workplace scheme. Equally, financial
advisers need clarity about the future of the State Pension if
they are to provide sound, long-term advice to individuals. We
urge the Government to proceed with its reform of the State Pension
without delay and to introduce its Bill on State Pension reform
in the 2012-13 session of Parliament.
The Government agrees that the existing State Pension
system needs to be simplified. It is complex and most people do
not know with certainty how much pension they will receive at
retirement or the extent to which their income will be means tested.
Both of these factors make planning for retirement difficult.
The Government will publish details of its proposals
for State Pension reform in a White Paper in spring, with final
decisions on the detailed implementation of the policy being taken
at the next Spending Review. The Government proposes to introduce
a Bill as soon as a legislative slot becomes available.
[Paragraph 38] We understand the complexities
in setting a minimum income threshold for automatic enrolment
and accept the rationale behind the current threshold levels.
The case for increasing the income threshold significantly above
its current level in real terms is not clear. As women have historically
retired earlier, and had lower earnings and lower pensions than
men, we believe that it is very welcome that auto-enrolment will
bring so many millions of women into pensions saving for the first
time. However, as women make up the majority of persistently lower
earners, the Government needs to consider the impact on the gender
pensions gap when setting the income threshold. We do not regard
it as essential that there should be a permanent link between
the auto-enrolment threshold and the income tax threshold.
The Secretary of State for Work and Pensions must
review and revise the automatic enrolment thresholds for each
tax year and may revise the rates in the light of factors that
include tax and national insurance rates, price and earnings information
and the prevailing rate of the State Pension.
The Government recognises that an automatic enrolment
earnings trigger excludes the very low earners from automatic
enrolment and this group comprises more women than men.
However, those with lower earnings are less likely
to benefit from pension saving than other groups. In determining
the appropriate level for the automatic enrolment trigger, the
Government has had to weigh the possible adverse impact on women
of a higher trigger, which may exclude lower earners from pension
saving, against the risk that a lower trigger may also adversely
impact on women by bringing lower earners into pension saving
inappropriately. It is also important to consider the current
"trigger" for automatic enrolment in the light of the
Government's planned reform to the State Pension which will impact
on incomes in retirement for lower earners.
Those with earnings below the automatic enrolment
earnings trigger will have a right to opt in to pensions saving
if they so wish, and will receive an employer contribution if
they have earnings higher than the lower limit of the contributions
The Automatic Enrolment (Earnings Trigger and Qualifying
Earnings Band) Revision Order with rates for 2012-13 was tabled
on 26 March for affirmative debate.
[Paragraph 42] We recognise the risk that some
employers may level down their existing pension provision to the
statutory minimum for auto-enrolment, although it is very difficult
to assess the extent to which this might take place in practice.
However, the risk that some employers may level down their contributions
is outweighed by the strong likelihood that auto-enrolment will
introduce millions of individuals to pension saving for the first
The Government recognises the risk that some employers
may level down their existing pension provision to the statutory
minimum for automatic enrolment. However, it considers the risk
to be low.
The Department has carried out an extensive programme
of research and analysis to understand the likely impact of the
reforms, and its evidence indicates employers have little appetite
for levelling down contributions. Research carried out by the
British Market Research Bureau and the National Institute of Economic
and Social Research on behalf of the Department in 2009 showed
that just 6% of employers currently contributing 3% or more intended
to level down, and over 90% of those who make contributions at
3% or more would maintain or increase contribution levels for
existing members. Research carried out by external organisations
also shows encouraging signs that levelling down will be minimal,
for example the EEF suggests only 2% of its members will reduce
contribution levels for their existing members of their pension
arrangements. Further DWP research was carried out in autumn 2011
which will be published in summer 2012.
The Department published an evaluation strategy for
the workplace pension reforms in July 2011.
This includes plans to monitor employer contribution levels for
existing members. In the early stages of implementation, this
will give a good indication of the extent of any levelling down
for existing members. Results based on the latest information
will be published annually during implementation. As well as specific
reporting, information will also be made public through publications
linked to each of the data sources used in the evaluation. This
will include information published by The Pensions Regulator.
[Paragraph 48] The minimum contribution of 8%
is an important and realistic starting point for auto-enrolment.
During the implementation stage, it is sensible for the Government
to encourage participation in pension saving by increasing individual
and employer contributions gradually to this moderate minimum
[Paragraph 49] It is unlikely that 8% will secure
a level of retirement provision which most employees would consider
adequate. The Government should therefore conduct a review to
examine a) how to promote saving above the 8% minimum; and b)
whether it should raise the statutory minimum above 8% over the
longer term. This review should take place by 2014, building on
the lessons learned from implementation up to that point. Waiting
until the review scheduled for 2017 to consider these issues could
mean that many employees miss out on higher pension contributions
for a longer period.
The Government agrees that it needs to consider how
to encourage savings beyond the minimum 8% contribution level.
Eight per cent was based on the Pensions Commission recommendation
in order to prevent severe under-saving, but also to minimise
the danger of the State encouraging people to save inappropriately.
The Government has always considered 8% to be a starting point
and it would be keen for most people and employers to contribute
more. In the communications and information provided to employers
and for individuals, the fact that the prescribed contribution
levels are a minimum is emphasised.
As part of its evaluation strategy for the workplace
pension reforms, the Department will monitor how much is being
saved in workplace pensions and seek to understand how much more
individuals are contributing towards their household savings.
In the future, there is the potential for communications messages
to push more firmly on the need to save more voluntarily and to
encourage increased levels of contributions.
The Government will need to consider carefully whether
it is appropriate to raise the statutory minimum above 8%. An
increase that included a requirement for employers to increase
their contributions would place an additional burden and cost
on business. In addition, it would be necessary to consider whether
requiring individuals to save more may encourage more people to
opt out and have the unintended consequence of fewer people saving
The Government does not consider that 2014 is the
right time to review the statutory minimum. Due to the phasing
of contributions, individuals will not have reached the 8% requirement
by this date and it will be too early to make a comprehensive
assessment of the impact of any change. The Government considers
it would be more appropriate to review the minimum contribution
once steady state has been reached and there is a sufficient evidence
base on which to make decisions.
ENSURING PENSION SCHEMES OFFER VALUE FOR MONEY
[Paragraph 55] Employers will be responsible
for ensuring that their pension provider meets the Government's
criteria for auto-enrolment. Providers are not currently required
to register with The Pensions Regulator to ensure that they are
eligible. This may represent a regulatory gap, and we are concerned
that some employers may unknowingly enrol their staff in schemes
that do not meet the criteria. Equally, the criteria for providers
appear relatively light compared with the New Zealand model. The
Government must monitor this situation closely. It should act
to strengthen the minimum criteria for providers, or require providers
to register with The Pensions Regulator, if it becomes clear that
some providers are not safeguarding the interests of pension scheme
The Government and The Pensions Regulator agree that
there should be minimum criteria. Further safeguards already exist
through pensions law, trust law and, in the case of personal pensions,
the requirements of the Financial Services Authority.
The Pensions Regulator recently commenced a substantive
regulatory programme designed to support the market in delivering
good outcomes for members of defined contribution work-based schemes,
intervening where the market appears unlikely to do so unaided.
As part of this programme, The Pensions Regulator
published six defined contribution principles which strengthen
the existing requirements. It believes these principles should
be present in a scheme if it is to deliver a good outcome for
members. To support this approach, The Pensions Regulator is currently
consulting with the industry on what features it expects to see
in defined contribution schemes. It will then be developing a
range of guidance to support employers in choosing schemes that
have these principles. The programme will design and deliver a
regulatory approach that aims to ensure the six principles are
present in schemes used for automatic enrolment.
The Pensions Regulator is observing market activity
and developments to identify if employer and provider behaviour
suggests that employers are choosing automatic enrolment schemes
which do not meet the minimum criteria and this will guide how
it intervenes in the market.
[Paragraph 61] If auto-enrolment is to be successful
in convincing people to increase their retirement saving, it is
essential that providers offer value for money for employees who
are automatically enrolled and that they demonstrate that this
is the case. A competitive market of providers should help promote
this but it will only work if charges are clear, understandable
and comparable. In the insurance industry, comparison websites
are available to enable people to compare providers, and we believe
that the pensions industry should aim to establish a similar model.
[Paragraph 62] Current industry practice and regulation
does not offer sufficient transparency for employers or savers.
We welcome the work that the NAPF and the pensions industry are
undertaking to develop transparency around pension scheme charges
and look forward to the NAPF's code of practice.
[Paragraph 63] We expect to see the industry make
progress on improving transparency and will continue to monitor
their actions in this regard. It is imperative that the pensions
industry establishes a clear, accessible and universally-adopted
model to allow the comparison of charges and that this is in place
by the end of 2012. This would ensure that the model is available
to all employers choosing schemes from 2013 onwards.
The Government shares the Committee's concern about
value for money from charges and that charges should be transparent
to members and employers choosing automatic enrolment schemes,
so that they can appreciate the effect that charges have.
The Government therefore welcomes efforts by the
pensions industry to improve transparency of charges, including
the NAPF's work to establish an industry-wide code of conduct
in this area. The Government understands that the NAPF aims to
produce its code of conduct by late summer, with the aim of having
it fully implemented by the New Year.
The purpose of the code is to ensure that charges
are presented to employers in a consistent way that will help
them understand the impact charges will have on the retirement
incomes of their employees and enable them to make informed choices
about which scheme to use for automatic enrolment.
The Government looks forward to hearing conclusions
about how the NAPF's code can bring clarity and comparability
to pension charges. The Government will offer its support to ensure
it can make real improvements in this area.
[Paragraph 70] It should be borne in mind that
the employer will choose the pension scheme but the consequences
of that choice in terms of the level of charges and the potential
lack of value for money will fall on the employee. Given the current
complexity of pension scheme charges, it is important that the
Government and the pensions industry create a model that helps
protect employers against the risk that they will, inadvertently,
select a scheme that offers poor value for money for their employees.
[Paragraph 71] The Government must monitor the
pension market to ensure that scale and competition between providers
is effective in keeping charges at a low level. We recommend that
the Government, or The Pensions Regulator, publish a report every
two years on the value for money of pension scheme charges, including
an assessment of the levels of fee applied under auto-enrolment.
[Paragraph 72] Whilst we accept the Government's
current rationale for not applying a cap on scheme charges, this
approach will only work if all providers act with transparency
and offer genuine value for money in relation to charges. During
2012, the pensions industry has an opportunity to demonstrate
that it can operate fairly and effectively without a cap on charges.
From 2013 onwards, if it transpires that some auto-enrolment providers
are applying hidden charges, or charges that represent poor value
for money, the Government should use its powers to intervene.
The Government and The Pensions Regulator agree that
value for money and transparency are key issues. The Government
has made clear that charges should not be excessive in relation
to the services being provided.
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.
In addition, The Pensions Regulator has included
value for money and transparency of charges as features of its
six defined contribution principles and expects them to be present
in pension schemes used for automatic enrolment. As part of its
defined contribution programme, The Pensions Regulator will be
designing an operational approach which will result in regulatory
interventions where schemes are not offering value for money.
[Paragraph 75] We welcome the Government's intention
to ban short service refunds. This measure will help individuals
experience the benefits of longer-term saving for retirement and
reduce the risk that their employer contributions will be lost.
The Government believes automatic enrolment and projected
increased labour mobility will lead to a significant increase
in small pension pots. The Department published on 15 December
2011 a consultation paper announcing its aim to abolish short
service refunds and setting out potential options to address the
issue of small pots.
This includes possible solutions ranging from small changes to
the current system to encourage transfers, to an automatic transfer
system where pension pots could either consolidate in one or more
aggregator schemes or move with people from job to job.
The Department is currently considering views received
from stakeholders about what solution will work in practice and
intends to publish a Government response in the summer.
[Paragraph 79] Active member discounts sometimes
reflect the additional costs of administering inactive pensions
but can also lead to disproportionately high charges for individuals
who are no longer contributing to their scheme. We believe that
pension providers should operate a fair balance between active
and deferred members and that the Government should consider intervening
if this issue is not resolved by greater consolidation of small
pots into single schemes.
The Government agrees that people should not experience
disproportionately high charges simply because they have moved
The Pensions Act 2011 extended the powers of the
Secretary of State for Work and Pensions to set a charge cap to
include deferred as well as active members. The Department will
monitor deferred member charges closely during automatic enrolment
and, if necessary, will consider taking action.
IMPLICATIONS FOR EMPLOYERS
[Paragraph 101] We recognise that auto-enrolment
will create new costs and administrative requirements for employers
at a time of economic uncertainty. However, we believe that, through
the staging and phasing arrangements, the Government has designed
a flexible and gradual implementation process with employers'
needs in mind.
[Paragraph 102] We understand the calls from employers'
representatives for some exemptions to auto-enrolment, for example
for micro businesses, but believe such concessions would add to
the complexity for employers, as well as having detrimental effects
for employees. It is also important to bear in mind that micro
businesses and their employees have to date been the hardest group
to reach in terms of workplace pension provision. We therefore
support the Government's decision that auto-enrolment should apply
to employers of all sizes.
[Paragraph 103] Whilst we recognise that the requirement
to re-enrol individuals every three years has administrative and
cost implications for employers, we believe this step is necessary
to ensure high levels of participation in workplace pension saving.
The Government notes the Committee's conclusions
and welcomes the support for its approach. The Government believes
that the staging and phasing arrangements will give employers
the time they need to prepare for the administrative impact and
adjust to the costs of the employer contributions. It also believes
that people who opt out first time around should have a periodic
reminder about the importance of saving. This should be at an
appropriate point when their circumstances may have changed and
they may make a different decision. This will ensure that inertia
does not keep them out of pension saving for good.
[Paragraph 110] We note with regret the delays
to the schedule for implementing auto-enrolment announced in November
2011, although we recognise that these delays may be welcome to
some small employers. The delays mean that millions of employees
will start workplace pension saving later than anticipated, and
overall retirement saving will be reduced significantly as a result.
It is vital that there is no further postponement to the implementation
timetable, and we welcome the Minister's assurance that the timetable
will not be changed again.
The Government's decision to postpone implementation
for small employers until the next Parliament was made in recognition
of the tough economic times that they are operating in and gives
them some additional breathing space. This is a sensible step
that ensures long-term pension issues are addressed while meeting
the short and medium-term needs of small business. The Government
remains committed to ensuring the employees of these small businesses
get the chance to save via automatic enrolment.
[Paragraph 113] Given the concerns that employers'
representatives have expressed about the administrative implications
of auto-enrolment, we believe that it is important that The Pensions
Regulator takes the steps necessary to ensure that payroll providers
are supporting employers towards a smooth transition to the new
The Pensions Regulator agrees that automation is
essential for many employers to be able to effectively comply
with their employer duties. Payroll systems and software will
play an important role in supporting the employer in the identification
of workers who need to be automatically enrolled and in deducting
the right pension contributions at the right time. It will continue
to work alongside other employer systems, for example human resource
processes, to help employers comply with wider duties, including
Recognising the importance of payroll systems, The
Pensions Regulator has established a specialist team, which engages
with the payroll industry to understand their implementation challenges
and to provide technical support. The Pensions Regulator also
attends and hosts regular workshops with payroll providers and
their customers. It will continue this liaison up to and through
staging to help ensure that payroll providers are able to support
their employer clients in complying with their duties.
The Pensions Regulator has also provided payroll
specification and guidance to the industry in April 2011 to allow
providers sufficient development time for their products. This
guidance is regularly updated as legislation changes.
[Paragraph 125] Ensuring employer compliance
is critical to the success of auto-enrolment and the programme
could suffer reputational damage if a large number of employers
are seen not to be fulfilling their duties. The resources that
the Government makes available for TPR to address non-compliance
must reflect emerging evidence on employer awareness and compliance
levels, particularly during the implementation phase for medium
and smaller employers.
The Pensions Regulator confirmed at its oral evidence
session that it considered, at that point in time, that it had
sufficient resources to deliver the employer compliance regime.
The Department has asked The Pensions Regulator to keep this under
review and to inform the Department of any concerns as necessary.
[Paragraph 126] Relying on whistleblowing to identify
non-compliance has inherent problems, particularly in respect
of small firms where the fact that a business has only one or
two employees will make it impossible for TPR to guarantee anonymity
to the person making a complaint. TPR needs to consider very carefully
how it will address this issue and whether it needs to use more
proactive methods to check compliance amongst small employers.
We therefore recommend that, by the end of 2013, TPR provide a
written update on its plans for dealing with non-compliance among
small and medium employers, drawing on its latest research on
employer awareness and preparation.
The Pensions Regulator will use a range of approaches
to identify and address non-compliance with employer duties and
will not rely solely on whistleblowing reports. It will use approaches
such as the registration process, where every employer must register
with The Pensions Regulator to confirm they have complied, to
intelligence-led, proactive investigation through the use of data
feeds from HMRC and other agencies, to help with the proactive
detection of employers who are not complying with their duties
The Pensions Regulator notes the Committee's concerns
around employee anonymity particularly in small businesses. Where
whistleblowing reports are received, it will have procedures in
place to ensure that the identity of the reporter is not disclosed
to the employer. The proactive compliance approach The Pensions
Regulator is taking will also help to protect individual anonymity.
The Pensions Regulator will publish its employer
compliance regime compliance and enforcement strategy and accompanying
policy in June 2012. This will set out its risk-based approach
to regulating the employer duties and how it intends to use its
powers. It has committed to reviewing this strategy in light of
emerging regulatory experience and research, and will be happy
to share any updates to the strategy with the Work and Pensions
[Paragraph 127] The Government should take steps
to ensure that HMRC, the Health & Safety Executive and other
relevant enforcement bodies are working closely with TPR to promote
compliance, including sharing relevant information where employers
are found to be in breach of their auto-enrolment requirements.
The Pensions Regulator agrees that a collaborative
approach amongst other relevant enforcement bodies experienced
in regulating and communicating with employers is essential to
proactively monitoring and addressing non-compliance. It is engaging
with many different bodies to gather information about their intelligence
and enforcement approach to employer compliance. This includes
HMRC, the Gangmasters Licensing Authority, the Health and Safety
Executive, the Department for Business, Innovation and Skills,
and the Employment Agency Standards Inspectorate. Learning from
these meetings has been incorporated into The Pensions Regulator's
In order to facilitate the sharing of tactical and
strategic information on employer compliance, The Pensions Regulator
has memoranda of understanding in place with HMRC, the Financial
Services Authority and the Association of Chief Police Officers.
It will consider developing further information-sharing processes
The Pensions Regulator and the Government will work
together to remove any barriers to promoting compliance.
[Paragraph 135] Effective communication will
be vital to ensuring employer compliance. The Government and The
Pensions Regulator must continue to research and monitor awareness
among employers and publish the findings. If awareness among smaller
employers remains low by 2014, we recommend that The Pensions
Regulator consider writing to employers earlier than 12 months
ahead of their staging date.
The Pensions Regulator's compliance approach is based
on educating and enabling employers of all sizes to comply with
their duties. It has produced extensive detailed guidance for
larger employers and their advisers and a range of interactive
tools for smaller employers and independent financial advisers.
This suite will be added to over the coming months with more guidance
for medium and small employers.
The employer letters are one part of a wider employer
communications strategy. The Pensions Regulator will be writing
to all employers at least 12 months and three months ahead of
their staging date. The largest employers have also been written
to 18 months in advance. These communications will remind employers
of their duties and the fact that they must comply, and provide
access to the information employers need to allow them to do so.
These dates are based on research into employers'
expected preparation times and the most effective communication
timings for employers of different sizes. The Pensions Regulator
will adjust its approach in light of regulatory experience which
may include amending the timing of the 12 month or three month
letters, along with continuously assessing the overall awareness
of its employer audience, of any size.
[Paragraph 141] Employers must be able to access
impartial information on choosing a workplace pension scheme for
their employees. We recommend that the Government and The Pensions
Regulator lead a discussion with employers and other relevant
stakeholders about the availability of independent and impartial
information. The Government should ensure that effective support
for small employers is available by July 2014 at the latest.
The Government and The Pensions Regulator agree that
employers have a significant responsibility to choose an appropriate
pension arrangement for their employees.
The Pensions Regulator's research indicates that
large employers generally have access to the advice needed to
choose a scheme, but recognises the potential information needs
of small and medium sized employers who may not wish to pay for
advice. To help address this need, The Pensions Regulator is both
seeking to ensure that all schemes meet the appropriate standard,
in particular the defined contribution principles, and that information
for employers on automatic enrolment signposts the importance
of schemes meeting the right standard. This new regulatory approach
may include guidance and other measures to enable schemes to meet
[Paragraph 147] While most employees will not
need one-to-one guidance on auto-enrolment it is important that
it is available for those who do. The Government and the pensions
industry should work together to ensure that individuals are able
to access independent one-to-one guidance, including by telephone
alongside online information. This information should include
well-publicised and sound guidance for individuals considering
opting out. Guidance to employers on choosing an auto-enrolment
scheme should also include information on how to involve employees
or their representatives in the choice.
The Government believes that individuals should
have access to simple and clear information about automatic enrolment.
Its research indicates that most people expect to receive such
information from their employer. In order to help employers with
their statutory duty to provide information to their workers,
the Department is working with The Pensions Regulator to develop
template letters and a simple interactive tool with guidance on
how to complete them. The Government expects this material to
be available on the The Pensions Regulator's website shortly.
Employers are required to signpost workers who want
more information to the Directgov website, where they can access
further more detailed information, including content for those
considering opting out. This source of information is also being
publicised through the Department's communications campaign which
was launched in January 2012. The Government's policy is that
information should be provided in a digital format by default.
However, if people have further questions, or are unable to access
Directgov, the Department's workplace pension information helpline
is available. The Department will refer people who need help with
complex pension queries to the Pensions Advisory Service, and
people who need help with budgeting and financial planning to
the Money Advice Service. The Department is also working with
the pensions industry to develop clear and consistent language
and signposting to sources of information.
The Government will consider the issue of providing
guidance to employers about involving employees or their representatives
in pension scheme choice, in conjunction with The Pensions Regulator.
THE OPERATION OF NEST
[Paragraph 175] We understand the rationale behind
the restrictions placed on NEST as part of the sensitive consensus
agreed between the Government and the various stakeholders. However,
we are very concerned that two restrictions will have unintended
consequences: the cap on contributions will add complexity for
small and medium businesses, and the ban on transfers will be
disruptive for both employers and employees who would like to
transfer existing pension pots into NEST. We believe that these
restrictions may prevent NEST from addressing the market failure
that it was designed to resolve. If state aid rules allow, we
therefore recommend that the Government removes the cap on contributions
and the ban on transfers as a matter of urgency.
The Government welcomes the Committee's consideration
of the NEST restrictions. NEST is one of many schemes which employers
can choose to use to fulfil their employer duties. Its purpose
is to fill a supply gap in the pensions market by offering a simple,
low-cost pension scheme to individuals on low to moderate earnings
and employers that the existing pensions industry does not serve
NEST is an impressive product and it is important
that employers consider fully whether it is an appropriate scheme
for their workers. If there are barriers, or perceived barriers,
to employers choosing NEST, where it is appropriate for them to
do so, the Government needs to consider carefully what can be
done to remove them. However, the evidence that the NEST restrictions
are acting as a barrier is not unequivocal and the Government
is conscious that the restrictions were designed to ensure that
NEST's focus remained on its target market. In particular, the
Committee is right to raise the issue of state aid. It would not
be lawful for the Government to remove the restrictions simply
to increase take up of NESTthere would need to be evidence
that such action is required to address market failure.
The Government will reflect further on the issues
raised by the Committee.
[Paragraph 176] The growing problem of small stranded
pension pots needs to be urgently addressed, and we warmly welcome
the Government's consultation on consolidating small pension pots.
NEST would appear to be the obvious choice for the role of aggregating
small pots into a single, larger pot. If the Government wishes
to pursue this option, it will of course need to remove the ban
on transfers of pension funds into NEST.
The Government welcomes the Committee's comment that
this is an issue that needs to be urgently addressed. The Government's
consultation on the issue of small pension pots closed on 23 March
and the responses are currently under consideration. The Government
notes a range of views have been expressed on the potential options,
and indeed the role of NEST, in responses that have been made
public by the relevant organisations. The Department intends to
publish its response to the consultation in the summer.
[Paragraph 182] Whilst we understand the views
of witnesses who considered NEST's investment strategy to be overly
conservative, we believe that NEST's approach has a clearly explained
behavioural rationale and will be distinctive in the marketplace.
It will help to ensure that savers are not deterred by potential
temporary falls in the value of their pensions which might lead
them to withdraw from their auto-enrolment scheme and exacerbate
resistance to retirement saving.
[Paragraph 183] Over the longer term the Government,
the pensions industry and NEST must act to increase savers' awareness
and understanding around the advantages and disadvantages of investments.
We recommend that the Government's communications strategy for
auto-enrolment includes a strong focus on improving the public's
understanding of effective retirement saving.
The Government agrees that it is important for the
public to have a good understanding of the importance of saving
for later life. The Department's communications campaign about
workplace pension reform includes such messages and provides information
showing how automatic enrolment can help people maintain the lifestyle
they want in retirement. This is reflected in the more detailed
information available through both the Directgov website and the
Department's workplace information helpline, and in the range
of materials including frequently asked questions, newsletter
articles and material developed to help employers communicate
with their workers.
The Government has set up the Money Advice Service
to help people understand and manage their money better. The service
provides free money advice and impartial information through its
multi-channel service: online, over the telephone and face-to-face.
The Money Advice Service is funded by the financial services industry
through a levy.
1 A summary of responses can be found at:
Workplace Pension Reforms Evaluation Strategy, Department for
Work and Pensions research report No 764 http://research.dwp.gov.uk/asd/asd5/rports2011-2012/rrep764.pdf.
Guidance for offering a default option for defined contribution
automatic enrolment pension schemes, Department for Work and
Pensions (May 2011) http://www.dwp.gov.uk/docs/def-opt-guid.pdf
Meeting future workplace pension challenges: improving transfers
and dealing with small pots, DWP, (December 2011).