The government’s new workplace pension scheme may be rejected by many of the employees it is deigned to help, the CBI has claimed.
The employers’ group has said that high charges may deter many from joining the National Employment Savings Trust (NEST) when its introduction begins in 2012.
It is planned that NEST, into which workers will be automatically enrolled if they are not members of an existing scheme, will help boost retirement saving. But employees can choose to opt out.
The CBI has argued that many will do just that because of the high initial costs scheme members will find themselves having to pay.
Those who join NEST in its early stages will be charged 2 per cent of their annual contribution, a fee that is meant to cover the set-up costs of the whole scheme. That will be on top of a 0.3 per cent annual management charge.
Calculations from the CBI suggest that, for the first 16 years after a pension opens, a saver in a private sector scheme running with a management charge of 0.4 per cent and contributing £1,000 per annum will be better off than their equivalent in a NEST scheme.
Even a relatively high management charge of 0.6 per cent – a rate which is already available to many firms – will be more attractive than NEST for the first six years.
While the CBI re-iterated its support for a much wider take-up of pension provision among private sector workers, the group warned that the scheme could be undermined when savers realise that putting money into a NEST account will leave them worse off for well over a decade when compared with saving into a pension with significantly lower average charges.
This may prompt many, particularly those in their 40s and 50s who will only save for a few years, to opt out of NEST, leaving them with lower pensions and defeating the government’s aim of boosting saving for retirement.
The CBI conceded that NEST is a cheaper option over longer timeframes, but added that the risk is that employees will not recognise the long-term view.
Worse, any large-scale defection from the scheme could lead to further increases in fees.
John Cridland, the CBI’s deputy director-general, said: “NEST is a key part of extending the offer of a good pension to everyone in the private sector. The scheme is meant to be low-cost and easy to understand, so that it spurs people to start saving. But the risk is that many staff will think they are getting a raw deal, and will quit the 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. The pensions time bomb is ticking loudly, and more people must be encouraged to save.”