UK - The Confederation of British Industry (CBI) has warned high initial charges on the proposed National Employment Savings Trust (NEST) could mean savers would be better off investing in private sector pension funds carrying annual management charges of up to 0.6% for at least the first six years.
The CBI argued employers are concerned that workers will be put off by the proposed charging structure for NEST, comprising an initial 2% charge of their contribution to cover set-up costs and a 0.3% AMC. (See earlier IPE article: NEST combination charge includes 2% for set-up)
It said while it is supportive of the 2012 reforms to encourage more people to save for retirement, the CBI feels higher charges could defeat this purpose. It said this is especially the case if savers, specifically those aged over 40, “realise that putting money into NEST will leave them worse off for well over a decade when compared with saving into a pension with significantly lower average charges”.
A briefing note prepared by the CBI revealed in comparison to the dual charging structure proposed for NEST, savers would be better off for up to nine years in a private pension scheme with a 0.5% AMC that would be “easily achievable by providers in a post-employer duty environment”.
The CBI claimed this is because the 2% contribution charge brings forward the payment of charges so the effective starting AMC is “well above 2% in year one and drops gradually to just above 0.3% over two decades”.
The organisation argued this proposed charging structure would penalise members who pay their first contributions in the early years, in addition to potential ‘double-dipping’ as contributions will be charged when they go into the fund as well as every year. It instead suggested NEST could achieve the same aims - based on a 2% real rate of return - by charging a flat AMC of 0.47%.
In its briefing paper, the CBI said a saver contributing £1,000 (€1,136) a year into a private pension with an AMC of 0.4% would pay less in charges each year for 16 years than if they entered NEST in 2012, based on a 2% real rate of return. This increases to 18 years if the return is set at 1% but reduces to 14 years if investment returns are an average of 4%.
Even where a private pension scheme has an AMC of 0.6%, the CBI’s calculations revealed savers would still be better off for six years before NEST would become cost-effective, no matter whether the rate of return is 1% or 4%.
The CBI said while the scheme is cheaper for those saving for more than 20 years, “the upfront costs could lead to more pullouts and, ultimately, a loss of the scale to maintain operations at 0.3% AMC”. This could mean the fees would have to be raised further.
John Cridland, deputy director-general of the CBI, said: “The scheme is meant to be low cost and easy to understand. But the risk is that many staff will think they are getting a raw deal, and will quit the NEST scheme. The next government needs to revisit the structure of these fees. We must make it easier for the low-paid to save by smoothing the cost, instead of front-loading it.”
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