The spending review on Wednesday will confirm whether the prior governments proposed compulsory pension scheme “NEST” (National Employment Savings Trust) will go ahead.
I think it should.
Pensioners are living longer, the proportion of workers to retirees is shifting, State Pensions are paid directly from taxation (rather than from a ‘fund’) and it is unrealistic to expect the government to continue the current level of commitment to those in later life.
So why does NEST help? Yes, it can be argued it’s another type of compulsory (with complex opt-out rules) deduction from salary that looks a lot like tax; Yes, it is potentially forces a further level of administration and legislation on employers; and Yes, it leaves employees with more decisions; but done right the advantages can outweigh the disadvantages.
In their book “Nudge”(highly recommended) Thaler & Sunstein propose that a good pension could be structured by a government (the book was written in 2008) would exhibit the following features:
- Sensible default – to avoid complex decisions either putting savers off, or being overly cautious/adventurous. Nest is potentially “inflation plus”, but will certainly be low involvement with low to moderate earners in mind
- “Save more tomorrow” – by gradually increasing contributions employees are encouraged to save more with time, but not in a way that immediately impacts their take home pay. Nest is anticipated to have tiered contributions over the first few years
- Enrol automatically – as “libertarian paternalists” Thaler & Sunstein encourage mechanisms that help individuals to ‘make the right choice’. Whilst enrolment is automatic and simple, opting-out is more difficult (and cancelled every three years)
- Offer a financial incentive – to promote saving now a clear benefit should be present. Nest will offer contributions that in the long run will be more than matched by an employer (once tax relief is accounted for)
- Be low cost – needless to say fees can erode a pension investment. Nest will certainly be simple, and low cost, circa 0.3-0.4% of fund value per annum
Finally, Thaler & Sunstein avoid being prescriptive, it should be accepted that some higher earning investors will be less well served by Nest, and they should have the facility to opt out through an Qualifying Scheme. It is these that may prefer to have more tailored Financial Planning Pensions advice, more complex choices; the legislation should be flexible enough to accommodate this.
