The pension minister’s announcement that restrictions on the National Employment Savings Trust will be abolished in 2017 is a significant step towards the end of the individual company pension scheme.
The European Commission’s decision to approve the lifting of the annual contribution cap of £4,500 and the removal of the ban on bulk transfers makes it much easier for a larger number of employers to choose Nest as their pension provider.
Nest was established by the government to ensure that small and medium sized business would have access to a low cost pension provider and would not, as part of the auto-enrolment, incur the eye-watering expensive of setting up their own individual pension plan.
Over time, however, it might well be the case that other employers will also decide to use Nest now the lifting of these restrictions make it easier for them to bulk transfer assets out of the company pension scheme.
But not only will it make easier for employers to use Nest, these steps will also make it simpler for employees. As the Nest’s chief executive, Tim Jones, said removing the cap on helps Nest members in building up their pots in the longer term.
The lifting of the restrictions not only helps members to pay more contributions into the master trust but it may encourage them to stay with Nest, even if they change employers. Once a sizeable nest egg has been built up, it might seem easier to keep paying in rather than switching to the new pension provider.
Opting to pay into a master trust throughout your working life gets round one of the major flaws of auto-enrolment – it is a 19th century solution to a 21st century problem as it assumes that people work for the same employer for most of their lives. Yet that’s simply not a realistic picture – according to Money Marketing, the average UK worker changes jobs 11 times during their career.
The government has sought to address this issue by making it easier for pension pots to follow members but this solution is messy and time-consuming. It’s much simpler to pay the same scheme throughout a working life rather than having to make a transfer each time an employee takes a new job.
The removal of these restrictions is a step in the right direction towards a more consolidated pension market. But I would not want Nest to become the only option available. While monopolies are never a good option, they are particularly heinous in the asset management industry.
Investment management, like technology and biotechnology, is an industry which suffers from diseconomies of scale. Successful investment management is all about allowing portfolio managers to follow new ideas and exploit untapped market opportunities. That doesn’t happen when firms become megalithic.
I hope that individual company pension schemes are replaced by a range of larger pensioner providers which in turn nurture the best and most innovative investment managers. This is not simply about preserving the asset management industry – it also offers the best outcome to future scheme members.