The government’s plans to establish a workplace pension scheme for lower paid employees have been criticised after it was revealed that people who join initially will have to pay a 2 per cent contribution fee.
The fee is in addition to a 0.3 per cent annual management charge.
The National Employment Savings Trust (NEST) is a personal pension scheme intended to provide up to 10 million workers with a retirement fund. It will be run by the Personal Accounts Delivery Authority (Pada).
Under the scheme, which is to be phased in from 2012, employees will contribute 4 per cent of earnings, employers 3 per cent and the government 1 per cent in tax relief.
Eventually, all employers will be obliged to enrol workers automatically into a workplace pension scheme of set minimum standards. NEST will provide a safety net for employers who cannot provide a better occupational scheme.
To protect the taxpayer, the government has decided to extend a loan to pay for NEST’s start-up costs, and the contribution fee, which is to apply to employer, employee and government contributions, will be used to repay the loan.
Once the loan is repaid, the fee will be abolished. However, the Department of Work and Pensions (DWP) has not indicated for how long the set-up fee will be chargeable.
Critics from the pensions industry argued that, on average, occupational pension schemes charged less than 0.5 per cent in management fees but did not levy a contribution cost, making NEST more expensive than many other funds.
Further concerns centred on those employees who join NEST when the contribution fee of 2 per cent is in place because, effectively, they will be subsidising savers who join after the fee has been dropped.
Pada has insisted that the charging structure will enable the management fee to be held at just 0.3 per cent and will safeguard taxpayers from the cost of establishing the scheme. It also argued that NEST will offer good value for money.
But Ros Altmann, an independent pensions consultant, voiced worries over the set-up fee: “The idea of taking away 2 per cent of people’s money before they even start saving strikes me as high, but of course the costs of administering tiny pots of money for decades is also high.”
Graeme Leach, director of policy at the Institute of Directors, also described the charges as high.
Mr Leach said: “The aspiration to deliver ongoing charges of 0.3 per cent is fine, but it looks like early savers into the NEST scheme will suffer higher charges on their contributions compared with those who join later, thus penalising those early joiners.
“How long the 2 per cent charge will run for is a moot point and is extremely difficult to model because of the way the scheme will be ‘phased and staged’ in, with the contribution rates increasing and employers taking up their new duties to auto-enrol in tranches, but it seems likely to apply for a number of years.”