Pensions timebomb: Will the UK suffer from empty NEST syndrome? AXA has revealed a lack of support for the planned pension reform, while the CBI has reported that savers are likely to be put off by high charges and a complicated structure.
 

New research from AXA has highlighted declining support among both employers and employees for the government’s pension reform plans, including personal accounts, due to be phased in from 2012.

AXA’s ‘Workplace Pensions’ report compares views on employee benefits issues in the UK workplace between now and 2006, shortly after the white paper on pension reform was released.

Since 2006, support among employers for the pension reform plans has halved to 26% from 52%. Support is lowest among smaller firms, and there has been a seven point fall in companies saying they will be able to ‘absorb the costs and comply’.

One-fifth (19%) of employers now say they will reduce employee numbers as a result. This is three points higher than in 2006, but fewer companies today would use the NEST scheme as an excuse to cut pension contributions. Plus, 21% of employers say they would ‘level down’ pension contributions to 3% of salary, which is five points lower than in 2006.

Bigger organisations reported stronger support for the scheme, with support rising from 19% of employers with up to 50 employees expressing support for the new system compared to a quarter of those with 50 to 249 employees and 38% of those with 250 or more employees saying they thought it was a good idea.

There is also concern that smaller firms, whom the implementation of NEST will affect the most, have not received sufficient information.

However the CBI also highlighted that the way the NEST is formulated may put individuals off saving within the scheme. CBI calculations show that for the first 16 years after a pension opens, a saver in a private sector scheme running with an AMC of 0.4% and contributing £1,000 per annum is better off than their equivalent in a NEST scheme. Even a relatively high AMC of 0.6% – a rate which is already available to many firms – will be more attractive than NEST for the first six years.

The CBI demonstrates that NEST is a cheaper option over longer timeframes, but the risk is that employees will not recognise the long-term view. They may also be unprepared or unable to save for long enough, or are unwilling to trust that the scheme will stay in place for two decades.

Any large scale defection from NEST may also mean that the scheme is unable to keep the existing proposed charging structure, and will have to raise the fees even further.

In the government plans, employees will automatically be enrolled in a pension scheme unless they choose to opt out, and NEST will cover staff whose employers do not have their own scheme.

John Cridland, CBI 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 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. The pensions timebomb is ticking loudly, and more people must be encouraged to save."
 
AXA found there was a reduction in the number of employees who would consider taking their contribution level above the 4% set out in the NEST scheme.

When employees were asked whether they would prefer to have a payment made into their pension or a short-term pay increase, one in four (25%) said they would favour the pay increase, which would be worth significantly less than the pension option over time.

Steve Folkard, head of pensions and savings policy, AXA Life, said: “We expected that support would have grown for the pension reform proposals, but our new findings do not make good reading for policy makers.

“Dignity in retirement is a genuine issue and we are concerned as to what level of benefit will be provided – particularly in the early years of the scheme before the full contribution levels are reached. The successful implementation of NEST will require much better engagement with employers and employees with more effective information and support programmes.”