Automatic enrolment in workplace pensions and the National Employment Savings Trust: Government Response to the Committee's Eighth Report of Session 2010-12 - Work and Pensions Committee Contents

Appendix: Government response


The Government welcomes the Eighth Report of the Work and Pensions Select Committee (Session 2010-12) on automatic enrolment in workplace pensions and the National Employment Savings Trust.

People are living longer and not saving enough to deliver the pension income they are likely to want or expect in retirement. That is why the Government is introducing automatic enrolment to encourage and enable people to save more.

Starting in October 2012, employers will have new duties to automatically enrol eligible workers into a workplace pension and to make a minimum contribution. NEST (National Employment Savings Trust) is one of the schemes employers can choose to meet their new duties. It is a low-cost, trust-based, occupational pension scheme and is designed for people who are largely new to pension saving.

Automatic enrolment will be rolled out gradually starting with larger employers. The new duties will not apply to small employers (those with fewer than 50 employees) until June 2015 at the earliest. The minimum level of contribution will also be phased in to help employers and individuals adjust to the additional costs of the reforms.

Automatic enrolment in workplace pensions will lead to major changes in saving behaviour. The Department for Work and Pensions (the Department) is leading the reform programme and The Pensions Regulator is responsible for ensuring that employers are aware of their duties and comply with them. The Department and The Pensions Regulator will monitor implementation and will respond swiftly where necessary.

Conclusions and recommendations


[Paragraph 18] We welcome the decision by successive governments to pursue auto-enrolment in order to address the steady decline in pension saving. The policy has been designed to encourage high levels of participation in workplace pension saving, whilst retaining an individual's freedom to opt out. The recommendations contained in our report are intended to support the successful implementation of auto-enrolment.

The Government welcomes the Committee's support.

[Paragraph 25] Retirement saving through auto-enrolment may be even more attractive to individuals if it offered additional financial incentives or flexibilities. We welcome the Minister's willingness to look at this again. In its review of auto-enrolment scheduled for 2017, the Government should consider the advantages and disadvantages, including the legal implications, of enabling individuals to withdraw pension savings to buy a first home. The New Zealand experience may offer evidence on the extent to which savers' behaviour has been affected by this aspect of the KiwiSaver scheme.

The Government completed a call for evidence in February 2011 on the potential to allow individuals early access to pension savings, and whether this flexibility may encourage more pension saving.[1]

From the evidence received, the Government concluded that early access to pension savings should not be considered at the present time since there is limited evidence that early access would have a positive effect on overall pension contribution levels, or provide significant help to individuals facing financial hardship. There was also a broad consensus that the extensive private pension reforms already planned, most notably the introduction of automatic enrolment, should be implemented before the Government considers further reform.

However, the Government confirmed that, once automatic enrolment had been fully phased in, it would carry out research into the reasons why some people decide to opt out. If this research reveals evidence that access to pension savings is a significant factor, the Government may decide to revisit the issue of early access to pensions.

[Paragraph 30] The current State Pension system, with its means-tested Pension Credit top-ups, may act as a disincentive to some individuals on lower incomes who are considering workplace pension saving. The Government's plans to reform the State Pension and reduce means-testing are therefore welcome, and essential in creating a simpler foundation pension which will enable people to increase their retirement saving with confidence that they will not be penalised by losing state benefits.

[Paragraph 31] The Government must set out its detailed plans for State Pension reform as a matter of urgency. Individuals need certainty on the Government's plans if they are to make informed decisions about their retirement saving and whether to remain enrolled in their workplace scheme. Equally, financial advisers need clarity about the future of the State Pension if they are to provide sound, long-term advice to individuals. We urge the Government to proceed with its reform of the State Pension without delay and to introduce its Bill on State Pension reform in the 2012-13 session of Parliament.

The Government agrees that the existing State Pension system needs to be simplified. It is complex and most people do not know with certainty how much pension they will receive at retirement or the extent to which their income will be means tested. Both of these factors make planning for retirement difficult.

The Government will publish details of its proposals for State Pension reform in a White Paper in spring, with final decisions on the detailed implementation of the policy being taken at the next Spending Review. The Government proposes to introduce a Bill as soon as a legislative slot becomes available.  

[Paragraph 38] We understand the complexities in setting a minimum income threshold for automatic enrolment and accept the rationale behind the current threshold levels. The case for increasing the income threshold significantly above its current level in real terms is not clear. As women have historically retired earlier, and had lower earnings and lower pensions than men, we believe that it is very welcome that auto-enrolment will bring so many millions of women into pensions saving for the first time. However, as women make up the majority of persistently lower earners, the Government needs to consider the impact on the gender pensions gap when setting the income threshold. We do not regard it as essential that there should be a permanent link between the auto-enrolment threshold and the income tax threshold.

The Secretary of State for Work and Pensions must review and revise the automatic enrolment thresholds for each tax year and may revise the rates in the light of factors that include tax and national insurance rates, price and earnings information and the prevailing rate of the State Pension.

The Government recognises that an automatic enrolment earnings trigger excludes the very low earners from automatic enrolment and this group comprises more women than men.

However, those with lower earnings are less likely to benefit from pension saving than other groups. In determining the appropriate level for the automatic enrolment trigger, the Government has had to weigh the possible adverse impact on women of a higher trigger, which may exclude lower earners from pension saving, against the risk that a lower trigger may also adversely impact on women by bringing lower earners into pension saving inappropriately. It is also important to consider the current "trigger" for automatic enrolment in the light of the Government's planned reform to the State Pension which will impact on incomes in retirement for lower earners.

Those with earnings below the automatic enrolment earnings trigger will have a right to opt in to pensions saving if they so wish, and will receive an employer contribution if they have earnings higher than the lower limit of the contributions band.

The Automatic Enrolment (Earnings Trigger and Qualifying Earnings Band) Revision Order with rates for 2012-13 was tabled on 26 March for affirmative debate.

[Paragraph 42] We recognise the risk that some employers may level down their existing pension provision to the statutory minimum for auto-enrolment, although it is very difficult to assess the extent to which this might take place in practice. However, the risk that some employers may level down their contributions is outweighed by the strong likelihood that auto-enrolment will introduce millions of individuals to pension saving for the first time.

The Government recognises the risk that some employers may level down their existing pension provision to the statutory minimum for automatic enrolment. However, it considers the risk to be low.

The Department has carried out an extensive programme of research and analysis to understand the likely impact of the reforms, and its evidence indicates employers have little appetite for levelling down contributions. Research carried out by the British Market Research Bureau and the National Institute of Economic and Social Research on behalf of the Department in 2009 showed that just 6% of employers currently contributing 3% or more intended to level down, and over 90% of those who make contributions at 3% or more would maintain or increase contribution levels for existing members. Research carried out by external organisations also shows encouraging signs that levelling down will be minimal, for example the EEF suggests only 2% of its members will reduce contribution levels for their existing members of their pension arrangements. Further DWP research was carried out in autumn 2011 which will be published in summer 2012.

The Department published an evaluation strategy for the workplace pension reforms in July 2011.[2] This includes plans to monitor employer contribution levels for existing members. In the early stages of implementation, this will give a good indication of the extent of any levelling down for existing members. Results based on the latest information will be published annually during implementation. As well as specific reporting, information will also be made public through publications linked to each of the data sources used in the evaluation. This will include information published by The Pensions Regulator.

[Paragraph 48] The minimum contribution of 8% is an important and realistic starting point for auto-enrolment. During the implementation stage, it is sensible for the Government to encourage participation in pension saving by increasing individual and employer contributions gradually to this moderate minimum level.

[Paragraph 49] It is unlikely that 8% will secure a level of retirement provision which most employees would consider adequate. The Government should therefore conduct a review to examine a) how to promote saving above the 8% minimum; and b) whether it should raise the statutory minimum above 8% over the longer term. This review should take place by 2014, building on the lessons learned from implementation up to that point. Waiting until the review scheduled for 2017 to consider these issues could mean that many employees miss out on higher pension contributions for a longer period.

The Government agrees that it needs to consider how to encourage savings beyond the minimum 8% contribution level. Eight per cent was based on the Pensions Commission recommendation in order to prevent severe under-saving, but also to minimise the danger of the State encouraging people to save inappropriately. The Government has always considered 8% to be a starting point and it would be keen for most people and employers to contribute more. In the communications and information provided to employers and for individuals, the fact that the prescribed contribution levels are a minimum is emphasised.

As part of its evaluation strategy for the workplace pension reforms, the Department will monitor how much is being saved in workplace pensions and seek to understand how much more individuals are contributing towards their household savings. In the future, there is the potential for communications messages to push more firmly on the need to save more voluntarily and to encourage increased levels of contributions.

The Government will need to consider carefully whether it is appropriate to raise the statutory minimum above 8%. An increase that included a requirement for employers to increase their contributions would place an additional burden and cost on business. In addition, it would be necessary to consider whether requiring individuals to save more may encourage more people to opt out and have the unintended consequence of fewer people saving for retirement.

The Government does not consider that 2014 is the right time to review the statutory minimum. Due to the phasing of contributions, individuals will not have reached the 8% requirement by this date and it will be too early to make a comprehensive assessment of the impact of any change. The Government considers it would be more appropriate to review the minimum contribution once steady state has been reached and there is a sufficient evidence base on which to make decisions.


[Paragraph 55] Employers will be responsible for ensuring that their pension provider meets the Government's criteria for auto-enrolment. Providers are not currently required to register with The Pensions Regulator to ensure that they are eligible. This may represent a regulatory gap, and we are concerned that some employers may unknowingly enrol their staff in schemes that do not meet the criteria. Equally, the criteria for providers appear relatively light compared with the New Zealand model. The Government must monitor this situation closely. It should act to strengthen the minimum criteria for providers, or require providers to register with The Pensions Regulator, if it becomes clear that some providers are not safeguarding the interests of pension scheme members.

The Government and The Pensions Regulator agree that there should be minimum criteria. Further safeguards already exist through pensions law, trust law and, in the case of personal pensions, the requirements of the Financial Services Authority.

The Pensions Regulator recently commenced a substantive regulatory programme designed to support the market in delivering good outcomes for members of defined contribution work-based schemes, intervening where the market appears unlikely to do so unaided.

As part of this programme, The Pensions Regulator published six defined contribution principles which strengthen the existing requirements. It believes these principles should be present in a scheme if it is to deliver a good outcome for members. To support this approach, The Pensions Regulator is currently consulting with the industry on what features it expects to see in defined contribution schemes. It will then be developing a range of guidance to support employers in choosing schemes that have these principles. The programme will design and deliver a regulatory approach that aims to ensure the six principles are present in schemes used for automatic enrolment.

The Pensions Regulator is observing market activity and developments to identify if employer and provider behaviour suggests that employers are choosing automatic enrolment schemes which do not meet the minimum criteria and this will guide how it intervenes in the market.

[Paragraph 61] If auto-enrolment is to be successful in convincing people to increase their retirement saving, it is essential that providers offer value for money for employees who are automatically enrolled and that they demonstrate that this is the case. A competitive market of providers should help promote this but it will only work if charges are clear, understandable and comparable. In the insurance industry, comparison websites are available to enable people to compare providers, and we believe that the pensions industry should aim to establish a similar model.

[Paragraph 62] Current industry practice and regulation does not offer sufficient transparency for employers or savers. We welcome the work that the NAPF and the pensions industry are undertaking to develop transparency around pension scheme charges and look forward to the NAPF's code of practice.

[Paragraph 63] We expect to see the industry make progress on improving transparency and will continue to monitor their actions in this regard. It is imperative that the pensions industry establishes a clear, accessible and universally-adopted model to allow the comparison of charges and that this is in place by the end of 2012. This would ensure that the model is available to all employers choosing schemes from 2013 onwards.

The Government shares the Committee's concern about value for money from charges and that charges should be transparent to members and employers choosing automatic enrolment schemes, so that they can appreciate the effect that charges have.

The Government therefore welcomes efforts by the pensions industry to improve transparency of charges, including the NAPF's work to establish an industry-wide code of conduct in this area. The Government understands that the NAPF aims to produce its code of conduct by late summer, with the aim of having it fully implemented by the New Year.

The purpose of the code is to ensure that charges are presented to employers in a consistent way that will help them understand the impact charges will have on the retirement incomes of their employees and enable them to make informed choices about which scheme to use for automatic enrolment.

The Government looks forward to hearing conclusions about how the NAPF's code can bring clarity and comparability to pension charges. The Government will offer its support to ensure it can make real improvements in this area.

[Paragraph 70] It should be borne in mind that the employer will choose the pension scheme but the consequences of that choice in terms of the level of charges and the potential lack of value for money will fall on the employee. Given the current complexity of pension scheme charges, it is important that the Government and the pensions industry create a model that helps protect employers against the risk that they will, inadvertently, select a scheme that offers poor value for money for their employees.

[Paragraph 71] The Government must monitor the pension market to ensure that scale and competition between providers is effective in keeping charges at a low level. We recommend that the Government, or The Pensions Regulator, publish a report every two years on the value for money of pension scheme charges, including an assessment of the levels of fee applied under auto-enrolment.

[Paragraph 72] Whilst we accept the Government's current rationale for not applying a cap on scheme charges, this approach will only work if all providers act with transparency and offer genuine value for money in relation to charges. During 2012, the pensions industry has an opportunity to demonstrate that it can operate fairly and effectively without a cap on charges. From 2013 onwards, if it transpires that some auto-enrolment providers are applying hidden charges, or charges that represent poor value for money, the Government should use its powers to intervene.

The Government and The Pensions Regulator agree that value for money and transparency are key issues. The Government has made clear that charges should not be excessive in relation to the services being provided.[3] It will monitor charges throughout automatic enrolment to ensure that disproportionately high charges do not pose a risk to good member outcomes. If this proves to be the case, the Government will take action.

In addition, The Pensions Regulator has included value for money and transparency of charges as features of its six defined contribution principles and expects them to be present in pension schemes used for automatic enrolment. As part of its defined contribution programme, The Pensions Regulator will be designing an operational approach which will result in regulatory interventions where schemes are not offering value for money.

[Paragraph 75] We welcome the Government's intention to ban short service refunds. This measure will help individuals experience the benefits of longer-term saving for retirement and reduce the risk that their employer contributions will be lost.

The Government believes automatic enrolment and projected increased labour mobility will lead to a significant increase in small pension pots. The Department published on 15 December 2011 a consultation paper announcing its aim to abolish short service refunds and setting out potential options to address the issue of small pots.[4] This includes possible solutions ranging from small changes to the current system to encourage transfers, to an automatic transfer system where pension pots could either consolidate in one or more aggregator schemes or move with people from job to job.

The Department is currently considering views received from stakeholders about what solution will work in practice and intends to publish a Government response in the summer.

[Paragraph 79] Active member discounts sometimes reflect the additional costs of administering inactive pensions but can also lead to disproportionately high charges for individuals who are no longer contributing to their scheme. We believe that pension providers should operate a fair balance between active and deferred members and that the Government should consider intervening if this issue is not resolved by greater consolidation of small pots into single schemes.

The Government agrees that people should not experience disproportionately high charges simply because they have moved jobs.

The Pensions Act 2011 extended the powers of the Secretary of State for Work and Pensions to set a charge cap to include deferred as well as active members. The Department will monitor deferred member charges closely during automatic enrolment and, if necessary, will consider taking action.


[Paragraph 101] We recognise that auto-enrolment will create new costs and administrative requirements for employers at a time of economic uncertainty. However, we believe that, through the staging and phasing arrangements, the Government has designed a flexible and gradual implementation process with employers' needs in mind.

[Paragraph 102] We understand the calls from employers' representatives for some exemptions to auto-enrolment, for example for micro businesses, but believe such concessions would add to the complexity for employers, as well as having detrimental effects for employees. It is also important to bear in mind that micro businesses and their employees have to date been the hardest group to reach in terms of workplace pension provision. We therefore support the Government's decision that auto-enrolment should apply to employers of all sizes.

[Paragraph 103] Whilst we recognise that the requirement to re-enrol individuals every three years has administrative and cost implications for employers, we believe this step is necessary to ensure high levels of participation in workplace pension saving.

The Government notes the Committee's conclusions and welcomes the support for its approach. The Government believes that the staging and phasing arrangements will give employers the time they need to prepare for the administrative impact and adjust to the costs of the employer contributions. It also believes that people who opt out first time around should have a periodic reminder about the importance of saving. This should be at an appropriate point when their circumstances may have changed and they may make a different decision. This will ensure that inertia does not keep them out of pension saving for good.

[Paragraph 110] We note with regret the delays to the schedule for implementing auto-enrolment announced in November 2011, although we recognise that these delays may be welcome to some small employers. The delays mean that millions of employees will start workplace pension saving later than anticipated, and overall retirement saving will be reduced significantly as a result. It is vital that there is no further postponement to the implementation timetable, and we welcome the Minister's assurance that the timetable will not be changed again.

The Government's decision to postpone implementation for small employers until the next Parliament was made in recognition of the tough economic times that they are operating in and gives them some additional breathing space. This is a sensible step that ensures long-term pension issues are addressed while meeting the short and medium-term needs of small business. The Government remains committed to ensuring the employees of these small businesses get the chance to save via automatic enrolment.

[Paragraph 113] Given the concerns that employers' representatives have expressed about the administrative implications of auto-enrolment, we believe that it is important that The Pensions Regulator takes the steps necessary to ensure that payroll providers are supporting employers towards a smooth transition to the new arrangements.

The Pensions Regulator agrees that automation is essential for many employers to be able to effectively comply with their employer duties. Payroll systems and software will play an important role in supporting the employer in the identification of workers who need to be automatically enrolled and in deducting the right pension contributions at the right time. It will continue to work alongside other employer systems, for example human resource processes, to help employers comply with wider duties, including information provision.

Recognising the importance of payroll systems, The Pensions Regulator has established a specialist team, which engages with the payroll industry to understand their implementation challenges and to provide technical support. The Pensions Regulator also attends and hosts regular workshops with payroll providers and their customers. It will continue this liaison up to and through staging to help ensure that payroll providers are able to support their employer clients in complying with their duties.

The Pensions Regulator has also provided payroll specification and guidance to the industry in April 2011 to allow providers sufficient development time for their products. This guidance is regularly updated as legislation changes.

[Paragraph 125] Ensuring employer compliance is critical to the success of auto-enrolment and the programme could suffer reputational damage if a large number of employers are seen not to be fulfilling their duties. The resources that the Government makes available for TPR to address non-compliance must reflect emerging evidence on employer awareness and compliance levels, particularly during the implementation phase for medium and smaller employers.

The Pensions Regulator confirmed at its oral evidence session that it considered, at that point in time, that it had sufficient resources to deliver the employer compliance regime. The Department has asked The Pensions Regulator to keep this under review and to inform the Department of any concerns as necessary.

[Paragraph 126] Relying on whistleblowing to identify non-compliance has inherent problems, particularly in respect of small firms where the fact that a business has only one or two employees will make it impossible for TPR to guarantee anonymity to the person making a complaint. TPR needs to consider very carefully how it will address this issue and whether it needs to use more proactive methods to check compliance amongst small employers. We therefore recommend that, by the end of 2013, TPR provide a written update on its plans for dealing with non-compliance among small and medium employers, drawing on its latest research on employer awareness and preparation.

The Pensions Regulator will use a range of approaches to identify and address non-compliance with employer duties and will not rely solely on whistleblowing reports. It will use approaches such as the registration process, where every employer must register with The Pensions Regulator to confirm they have complied, to intelligence-led, proactive investigation through the use of data feeds from HMRC and other agencies, to help with the proactive detection of employers who are not complying with their duties in full.

The Pensions Regulator notes the Committee's concerns around employee anonymity particularly in small businesses. Where whistleblowing reports are received, it will have procedures in place to ensure that the identity of the reporter is not disclosed to the employer. The proactive compliance approach The Pensions Regulator is taking will also help to protect individual anonymity.

The Pensions Regulator will publish its employer compliance regime compliance and enforcement strategy and accompanying policy in June 2012. This will set out its risk-based approach to regulating the employer duties and how it intends to use its powers. It has committed to reviewing this strategy in light of emerging regulatory experience and research, and will be happy to share any updates to the strategy with the Work and Pensions Select Committee.

[Paragraph 127] The Government should take steps to ensure that HMRC, the Health & Safety Executive and other relevant enforcement bodies are working closely with TPR to promote compliance, including sharing relevant information where employers are found to be in breach of their auto-enrolment requirements.

The Pensions Regulator agrees that a collaborative approach amongst other relevant enforcement bodies experienced in regulating and communicating with employers is essential to proactively monitoring and addressing non-compliance. It is engaging with many different bodies to gather information about their intelligence and enforcement approach to employer compliance. This includes HMRC, the Gangmasters Licensing Authority, the Health and Safety Executive, the Department for Business, Innovation and Skills, and the Employment Agency Standards Inspectorate. Learning from these meetings has been incorporated into The Pensions Regulator's compliance approach.

In order to facilitate the sharing of tactical and strategic information on employer compliance, The Pensions Regulator has memoranda of understanding in place with HMRC, the Financial Services Authority and the Association of Chief Police Officers. It will consider developing further information-sharing processes as necessary.

The Pensions Regulator and the Government will work together to remove any barriers to promoting compliance.


[Paragraph 135] Effective communication will be vital to ensuring employer compliance. The Government and The Pensions Regulator must continue to research and monitor awareness among employers and publish the findings. If awareness among smaller employers remains low by 2014, we recommend that The Pensions Regulator consider writing to employers earlier than 12 months ahead of their staging date.

The Pensions Regulator's compliance approach is based on educating and enabling employers of all sizes to comply with their duties. It has produced extensive detailed guidance for larger employers and their advisers and a range of interactive tools for smaller employers and independent financial advisers. This suite will be added to over the coming months with more guidance for medium and small employers.

The employer letters are one part of a wider employer communications strategy. The Pensions Regulator will be writing to all employers at least 12 months and three months ahead of their staging date. The largest employers have also been written to 18 months in advance. These communications will remind employers of their duties and the fact that they must comply, and provide access to the information employers need to allow them to do so.

These dates are based on research into employers' expected preparation times and the most effective communication timings for employers of different sizes. The Pensions Regulator will adjust its approach in light of regulatory experience which may include amending the timing of the 12 month or three month letters, along with continuously assessing the overall awareness of its employer audience, of any size.

[Paragraph 141] Employers must be able to access impartial information on choosing a workplace pension scheme for their employees. We recommend that the Government and The Pensions Regulator lead a discussion with employers and other relevant stakeholders about the availability of independent and impartial information. The Government should ensure that effective support for small employers is available by July 2014 at the latest.

The Government and The Pensions Regulator agree that employers have a significant responsibility to choose an appropriate pension arrangement for their employees.

The Pensions Regulator's research indicates that large employers generally have access to the advice needed to choose a scheme, but recognises the potential information needs of small and medium sized employers who may not wish to pay for advice. To help address this need, The Pensions Regulator is both seeking to ensure that all schemes meet the appropriate standard, in particular the defined contribution principles, and that information for employers on automatic enrolment signposts the importance of schemes meeting the right standard. This new regulatory approach may include guidance and other measures to enable schemes to meet the principles.

[Paragraph 147] While most employees will not need one-to-one guidance on auto-enrolment it is important that it is available for those who do. The Government and the pensions industry should work together to ensure that individuals are able to access independent one-to-one guidance, including by telephone alongside online information. This information should include well-publicised and sound guidance for individuals considering opting out. Guidance to employers on choosing an auto-enrolment scheme should also include information on how to involve employees or their representatives in the choice.

The Government believes that individuals should have access to simple and clear information about automatic enrolment. Its research indicates that most people expect to receive such information from their employer. In order to help employers with their statutory duty to provide information to their workers, the Department is working with The Pensions Regulator to develop template letters and a simple interactive tool with guidance on how to complete them. The Government expects this material to be available on the The Pensions Regulator's website shortly.

Employers are required to signpost workers who want more information to the Directgov website, where they can access further more detailed information, including content for those considering opting out. This source of information is also being publicised through the Department's communications campaign which was launched in January 2012. The Government's policy is that information should be provided in a digital format by default. However, if people have further questions, or are unable to access Directgov, the Department's workplace pension information helpline is available. The Department will refer people who need help with complex pension queries to the Pensions Advisory Service, and people who need help with budgeting and financial planning to the Money Advice Service. The Department is also working with the pensions industry to develop clear and consistent language and signposting to sources of information.

The Government will consider the issue of providing guidance to employers about involving employees or their representatives in pension scheme choice, in conjunction with The Pensions Regulator.


[Paragraph 175] We understand the rationale behind the restrictions placed on NEST as part of the sensitive consensus agreed between the Government and the various stakeholders. However, we are very concerned that two restrictions will have unintended consequences: the cap on contributions will add complexity for small and medium businesses, and the ban on transfers will be disruptive for both employers and employees who would like to transfer existing pension pots into NEST. We believe that these restrictions may prevent NEST from addressing the market failure that it was designed to resolve. If state aid rules allow, we therefore recommend that the Government removes the cap on contributions and the ban on transfers as a matter of urgency.

The Government welcomes the Committee's consideration of the NEST restrictions. NEST is one of many schemes which employers can choose to use to fulfil their employer duties. Its purpose is to fill a supply gap in the pensions market by offering a simple, low-cost pension scheme to individuals on low to moderate earnings and employers that the existing pensions industry does not serve well.

NEST is an impressive product and it is important that employers consider fully whether it is an appropriate scheme for their workers. If there are barriers, or perceived barriers, to employers choosing NEST, where it is appropriate for them to do so, the Government needs to consider carefully what can be done to remove them. However, the evidence that the NEST restrictions are acting as a barrier is not unequivocal and the Government is conscious that the restrictions were designed to ensure that NEST's focus remained on its target market. In particular, the Committee is right to raise the issue of state aid. It would not be lawful for the Government to remove the restrictions simply to increase take up of NEST—there would need to be evidence that such action is required to address market failure.

The Government will reflect further on the issues raised by the Committee.

[Paragraph 176] The growing problem of small stranded pension pots needs to be urgently addressed, and we warmly welcome the Government's consultation on consolidating small pension pots. NEST would appear to be the obvious choice for the role of aggregating small pots into a single, larger pot. If the Government wishes to pursue this option, it will of course need to remove the ban on transfers of pension funds into NEST.

The Government welcomes the Committee's comment that this is an issue that needs to be urgently addressed. The Government's consultation on the issue of small pension pots closed on 23 March and the responses are currently under consideration. The Government notes a range of views have been expressed on the potential options, and indeed the role of NEST, in responses that have been made public by the relevant organisations. The Department intends to publish its response to the consultation in the summer.

[Paragraph 182] Whilst we understand the views of witnesses who considered NEST's investment strategy to be overly conservative, we believe that NEST's approach has a clearly explained behavioural rationale and will be distinctive in the marketplace. It will help to ensure that savers are not deterred by potential temporary falls in the value of their pensions which might lead them to withdraw from their auto-enrolment scheme and exacerbate resistance to retirement saving.

[Paragraph 183] Over the longer term the Government, the pensions industry and NEST must act to increase savers' awareness and understanding around the advantages and disadvantages of investments. We recommend that the Government's communications strategy for auto-enrolment includes a strong focus on improving the public's understanding of effective retirement saving.

The Government agrees that it is important for the public to have a good understanding of the importance of saving for later life. The Department's communications campaign about workplace pension reform includes such messages and provides information showing how automatic enrolment can help people maintain the lifestyle they want in retirement. This is reflected in the more detailed information available through both the Directgov website and the Department's workplace information helpline, and in the range of materials including frequently asked questions, newsletter articles and material developed to help employers communicate with their workers.

The Government has set up the Money Advice Service to help people understand and manage their money better. The service provides free money advice and impartial information through its multi-channel service: online, over the telephone and face-to-face. The Money Advice Service is funded by the financial services industry through a levy.

1   A summary of responses can be found at:


2   Workplace Pension Reforms Evaluation Strategy, Department for Work and Pensions research report No 764  Back

3   Guidance for offering a default option for defined contribution automatic enrolment pension schemes, Department for Work and Pensions (May 2011)  Back

4   Meeting future workplace pension challenges: improving transfers and dealing with small pots, DWP, (December 2011).


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