HC1494 Work & Pensions CommitteeWritten evidence submitted by NOW: Pensions (supported by the Danish Pension fund ATP)

Introduction

About NOW: Pensions

1. ATP has been following the UK market for some time and was a preferred bidder for the administration of NEST.

2. NOW: Pensions is a trust based multi employer scheme being set up in anticipation of auto-enrolment. NOW: Pensions will offer a simple, cost efficient pension, that delivers long-term stable returns. The delivery is based on international best practice of delivering quality pensions. Based on the Danish Pension fund ATP’s 45 years of experience servicing virtually the entire Danish working population (4.7 million members). The ATP Danish investment team leveraging their scale (c 80 billion GBP) and processes will manage the investment. The administration will be done through Xafinity Paymaster an established UK based administrator.

3. NOW: Pensions is setting up its systems, structures and staffing and will be enrolling the first employers and members early next year.

Auto-Enrolment

4. NOW: Pensions is strongly supportive of the 2012 reforms and we believe it is the right initiative to encourage savings and utilize employees’ faith in their employers to support the building of a new savings culture.

5. Auto-enrolment is part of a very broad consensus based on the Turner proposals. It is crucial that that consensus continues to involve employer organisations, the unions and the major political parties. There is a real risk of that consensus unravelling if there is any suggestion of postponing the implementation of auto-enrolment.

Some of the key focus areas are

6. An urgent need to finalise rules, execute and clearly communicate auto-enrolment to businesses and individuals to provide a chance to prepare and make auto-enrolment a success.

7. Make it easy for employers to choose and qualify a scheme and then relieve them of any future liability for that choice.

8. Create trust in auto-enrolment by securing that the pension provision offered by “auto-enrolment providers” is delivering value to the members.

Auto-enrolment—Why is it Necessary?

9. With such a large number of employees not saving for their retirement, there is a clear need for change. This is the clear message of the Turner Report.

10. The 2012 pension reforms can be seen as soft compulsion and in our view this is the only way to make sure as many as possible will start to save. Inertia is a powerful weapon and combined with employees’ trust in their employer this is probably the best way to make people save.

11. In regard to the issue of means testing and whether it is worth saving for the lowest income groups NOW: Pensions believe a reform of the state pension system is the solution, which the Government is also looking into.

12. In our view there seem to be too much debate about whether it is good for individuals to save eg if they have student loans, etc. In reality there is never a “good” time to start saving for the key target group of auto-enrolment. Most people need to start to save early because they will never be able to afford to make high enough contributions at a later stage.

13. Making auto-enrolment work is a unique opportunity to create a workplace pensions landscape offering much more value than is currently delivered. It is not only about securing against poverty in retirement, but also about having a dignified retirement and making a long needed restructuring of the pension industry.

Answers to Specific Queries

DWP’s communication strategy for introducing auto-enrolment and provision of advice and support to employers and employees

14. In our view the main thing now is to keep messages simple and consistent so that it is understood that it is worth saving, auto-enrolment will come, and it will be a major but positive change.

15. With this in mind, we should be able to work together with NEST to insure people understand these messages. It is in all our interests to make auto-enrolment work.

16. The key issue as we see it, is the lack of trust in the pensions industry. Charging structures need to be simple, easy to understand and governance needs to be transparent in all respects.

For phasing and stageing the introduction of auto-enrolment

17. Auto-enrolment will be costly and administratively burdensome for employers at the outset. As part of the consensus reached around the Pensions Commission’s recommendations, the Government agreed to stage the introduction of auto-enrolment over a number of years, to give employers time to prepare. Employer contributions are also gradually increasing from 1% to 3% to help employers adjust to the cost of auto-enrolment.

18. The Pension Regulator provides simple guidance. We believe this is good and as a provider we are looking at how we can make it as easy as possible for employers to comply.

Likely impact of auto-enrolment on business, especially small and micro-businesses

19. A reform of this magnitude impacts both small and large businesses. From a business perspective it is a new administrative burden.

20. The administrative burden is important and will be impossible to completely eliminate in the set up stage. If set up well and the provider supports the process, the implementation can be made easier and future compliance should be relatively simple for the employers. We have concluded that it is possible to manage most of the auto-enrolment process on behalf of the employers and we are well advanced in building a system to support this. We want to make the process as simple as possible for employers of all sizes.

21. We are still awaiting clarity on some rules and there is therefore a urgent need for having a final set of rules. This is in our view more urgent than simplifying them even though simpler rules would be helpful.

22. For smaller employers it is particularly difficult and time consuming to find and decide on the right pension provider. We believe more public guidance could be given here. Such as offering employers a list of good qualified schemes, where the employer will not be held liable if choosing one of these.

Role of the Pensions Regulator, including certification of schemes

23. The Pensions Regulator is doing a very good job in explaining employer duties and preparing to help employers comply and react to enforce the rules.

24. There is a genuine concern about master trusts being set up without transparent governance and wholly independent trustees. NOW: Pensions have established an advisory board consisting of Lord (John) Monks former head of ETUC and TUC, Nigel Waterson former Shadow Pensions Minister, Imelda Walsh former Group Head of HR Sainsbury’s and Chris Daykin former Government Actuary. And it is planned they will become independent trustees in Q4 2011. Their duty will be to look after the interests of the members.

25. We would welcome a formal certification process of schemes by the Regulator. The quality of scheme governance needs to be ensured, handling both conflicts of interests and securing the pension funds’ ability and aim to work in the best interests of its members. We believe the Regulator could play an even greater role in this. A certification would if constructed correctly relieve employers of any future liability when choosing a certified scheme. Over time this would be a cornerstone in creating more trust in the industry and perhaps a more consolidated pension market.

Estimated opt-out rates, including the possible impact on NEST if the numbers auto-enrolled are significantly lower than predicted

26. A sad but unavoidable problem is that there is a general lack of trust in the industry. This could mean that more people opt-out as they believe it’s not worth saving, since all savings disappear in costs and poor performance. This is the reaction we have had from a number of individuals writing to us to help them with their savings. Costs are too high and most UK savers have far too much risk in their investments. Typically savers are over exposed to equity even if they have not made any choices and are in a default fund. Many continue to have this risk exposure even close to retirement.

27. In any event there will still be millions of new savers. There will be plenty of customers for NEST and for us.

28. NEST will need scale and the number they have mentioned is minimum two million members. That kind of scale can only be obtained if auto-enrolment is run according to plan and with a clear communication around the value of saving.

NEST’s potential market share and the possible effects on other providers

29. NEST will have a key role making sure all employers are able to offer a pension to their employees. It must keep it’s focus on it’s target market and we genuinely hope it will be successful. As a totally new venture it needs to be sure its IT etc all works from day one.

30. There is already evidence showing that suddenly some existing providers are expanding their offering to lower income groups when employed with large companies. There are reservations about the governance of some so called master trusts.

31. There will also be new entrants like NOW: Pensions coming to the market but we believe this competition will increase the quality of workplace pensions. There will be competition in the post 2012 world and so there should be.

Whether auto-enrolment is likely to attract new providers and encourage new models of provision

32. NOW: Pensions is a new provider in the UK market (supported by Danish ATP) attracted by auto-enrolment.

33. Our business is based on the fact that large trust based schemes can offer better value and better governance to their members. Large schemes can afford quality IT solutions, they have buying power and critical mass. Investments are clearly also a scale business. Not only does buying power matter, but having the scale to implement proper risk management processes and have in-house managers means that investment costs and performance can be improved significantly. ATP’s performance for the past 10 years has given an average return of 7.4% per annum this is c 2% higher returns year on year than the average pension fund.

34. The optimal result of auto-enrolment would be a small number of very large pension funds (preferably trust based) running the UK work place pensions. These schemes would compete and ensure that employers have different offerings. It would also have the scale to offer really good pensions. Something similar has been suggested by the NAPF with their SUPER Trust idea.

35. There is however a risk that auto-enrolment would either result in something similar to stakeholder, with too many providers, or its employees would be auto-enrolled into schemes that are not offering a decent proposition or a credible governance structure.

36. Competitors like us will ensure the quality of pension provision and that costs and services provided by NEST and others remain competitive and of high quality.

Likely impact of the limitations placed on NEST, including the contributions cap and the ban on transfers

37. Clearly the annual contribution cap and restriction on transfers are set out in the legislation. Again, there was a consensus at the time that there should be these restrictions upon NEST, at least initially. However, these restrictions may well be removed following the review planned for 2017.

38. Also, to ensure a smooth launch for NEST, we are sure they would not wish these additional complications at present. In other words the NEST offering has to be kept as simple as possible to ensure a successful launch.

39. Of course, NOW: Pensions has no such restrictions and an employer who wished to have all their staff (including higher earners) enrolled or to be more generous in their contributions from day one may be attracted to our model. In the same way we could allow transfers from the outset.

NEST’s investment strategy

40. NEST has produced a detailed strategy based on research. It could be described as a cautious strategy.

41. Our investment strategy is based on our existing strategy which has been refined over 45 years experience. Core to our belief is keeping it simple for the members which will also reduce the need for advice and give better outcomes.

42. Our experience and research shows that for most members choice is a burden. And the fact is when there is choice 95% end up in the default fund.

43. Obviously the complexity under the surface is increasing and the current economic environment is not making things easier. Innovation and new investment solutions are important to secure better outcomes, but they increase the requirements for good internal investment people.

44. In our view there is need for our approach which is based on a highly diversified risk managed solution adjusting to the volatility in the market and smoothing into retirement. That is being invested in an ethical and socially responsible manner.

45. In this context we would suggest new reporting requirements from the FSA or TPR on default fund options and risk management to ensure proper default options are being offered to all savers in the UK.

Possible measures to reduce the proliferation of small pension pots

46. Looking at the UK DC market with its c46,500 DC funds it is clear that there is need for consolidation. There are simply too many small pension funds. Since pensions are a scale business a side effect of auto-enrolment could be the start of a consolidation process. However consolidation does not start of itself, there is need for a regulatory push to make this happen.

47. NOW: Pensions would support a simplification of the process of consolidating pots. In Denmark the industry has agreed on an electronic policy transfer system that automates this process so it is easy to consolidate. Perhaps lessons could be learned from this experience.

The extent to which auto-enrolment is likely to achieve the desired behavioral change in terms of encouraging people to make provision for retirement

48. We strongly support the post Turner consensus. From 2012, all UK employers will be required to follow automatic enrolment. This will be a huge step forward and will bring millions of people into pension saving for the first time. To make the behavioural impact of auto-enrolment more effective, Government must engage in a comprehensive communications campaign aimed at individuals and employers, which should provide clear messages about the importance of saving for retirement and be the building block for recreating trust in the pensions.

14 October 2011