APPENDIX 1: DRAFT NATIONAL EMPLOYMENT
SAVINGS TRUST ORDER 2010
Supplementary information from the Department
for Work and Pensions
Auditing
Q1. Paragraph 7.8
of the EM (second bullet) says that during the passage of the
Bill Ministers announced that because of the potential size of
the scheme it would not be subject to "traditional audit
arrangements". Please specify what audit arrangements it
will be subject to and how they differ from the norm.
A1. The audit arrangements
for occupational pension schemes which are in existing pensions
legislation will apply to NEST. However, during the passage of
the Pensions Act 2008, an amendment was tabled to provide that
NEST should not be subject to the requirement to obtain an auditor's
statement about employer contributions. This was because the size
and scale of the scheme (there will be millions of members and
hundreds of thousands of contributing employers) would make it
impractical to audit employer contributions. This proposition
was supported by the Institute of Chartered Accountants in England
and Wales. Consequently, the Government gave an assurance that
NEST would not have to comply with this requirement. This provision,
therefore, exempts NEST from this requirement. However they will
otherwise have to present audited accounts in the normal way.
NEST will have strong internal controls, including
an internal audit function. The processes introduced to carry
out checks on contributions will be overseen by this function
and will be reviewed on a regular basis to confirm that they are
effective. PADA is currently discussing with potential administration
suppliers, the processes that can be put in place to check that
the amounts of contributions received from employers are in line
with the expected amounts required by an employer's Payments Schedule
and regular payment patterns.
In addition, NEST will by way of online access to
pension account information, provide a high level of transparency
to members and employers in relation to the contributions it receives.
Members will, therefore, be able to check contributions paid to
their account on a regular basis. Members who identify shortfalls
in the contributions paid to NEST on their behalf, will be able
to contact their employer, NEST or the Pensions Regulator.
Funding of costs
Q2. NEST regulation
27(i) says the Trustee must make deductions from member's pension
accounts to contribute to general costs of set up and running.
The Committee was concerned that the set up costs will be front
loaded ie later joiners will get a better deal. They note that
there are a number of provisions in reg 27(8) that aim at general
equality but were not clear whether this aspect was covered.
A2. During the passage
of the Pensions Act 2008, the Government set out its intention
that NEST should be self-financing over the long-term. This means
that all of its set-up and operational costs will be met through
the charges paid by its members. This is necessary to meet the
Government's policy intention that the scheme is delivered at
nil overall cost to taxpayers.
The provisions in article 27(8) are part
of the scheme's public service obligation to serve all employees
eligible to join it at the same level of charge, irrespective
of certain characteristics of themselves and their employer e.g.
size of firm or an employee's earnings. It does not, however,
relate to the time period in which the member joins the scheme
(ie all members in the scheme at any point in time will be charged
on the same basis, but the level of charges can change over time).
The Government has made clear throughout the development
of these reforms, including in its December 2006 White Paper,
that because of the need for the scheme to meet its own set-up
costs, it will need to levy a slightly higher level of charges
in the short to medium term than over the longer-term. However,
the scheme has been specifically designed to ensure that it will
be sufficiently low cost that all cohorts of members, including
those joining the scheme from its inception, will benefit from
a substantial reduction in charges compared to what is currently
available for those in the scheme's target group.
Q3. The Committee
also note that page 99 of the Impact Assessment at paragraph 6.6
(second indent) says costs for set up will need to be "subsidised"
until sufficient membership charges build up - what is the likely
scale and duration of this "subsidy"? Do you have a
projection for when the scheme is expected to begin to be self-financing?
That paragraph says that the source of this finance is still to
be determined - can you please explain why this is not yet clear
since it is possible the policy cannot be implemented if start
up finance is not available.
A3. During its early
years, NEST will face a funding gap. Revenue from membership charges
will not begin to flow into NEST until it launches in 2011 and
will then take time to build up before it is sufficient to cover
all of the scheme's costs. The scheme will need to obtain repayable
finance to bridge this inevitable short-term funding gap.
The Department for Work and Pensions and the Personal
Accounts Delivery Authority (PADA) are developing a funding strategy
to find the best way to bridge this funding gap. This will meet
the commitments the Government made to Parliament during the passage
of the Pensions Act 2008 that it will need to be consistent
with the aim of delivering low costs to members, enable the scheme
to become self-financing in the long-run and that it will be affordable
and be delivered at nil overall cost to taxpayers. It will also
need to avoid providing the scheme with any unfair advantage relative
to other pension providers and be compatible with European Competition
law which is specifically designed to prevent this from happening.
We cannot at this stage provide the Committee with
any further details of the scheme's cost and funding strategy.
PADA are in the process of procuring the administration, fund
management and other services that will underpin the scheme. Only
once these procurements are complete will we have a full understanding
of costs and be able to take final funding decisions. Furthermore,
releasing our estimates of the scheme's cost at this stage could
jeopardise PADA's commercial negotiations, limiting their ability
to secure the best value for money for their members.
The Government is, however, confident that suitable
arrangements can be put in place and has made clear its intention
to put such information into the public domain once it is no longer
commercially sensitive.
Security of the scheme
Q4. Given that
the scheme is based on investments is there the potential that
the value of funds could go down as well as up? Is there the potential,
however slight, that participants may eventually withdraw less
than the value of their contributions?
A4. The purpose of
the Government's reform strategy is to enable individuals to make
greater financial provision for their retirement. This includes
making contributions to a defined contribution pension scheme
which meets defined quality standards. A defined contribution
pension scheme aims to earn a return on contributions by making
appropriate investments. This inevitably involves making a judgement
on the balance between the anticipated return from an investment
and exposure to risk.
PADA is carrying out the initial work on the investment
approach for NEST and will make recommendations to the NEST Corporation
who will, as trustee of NEST, make all investment decisions. PADA
has spent the last 18 months extensively consulting with the pensions
and investment industry, unions, employer representatives, consumer
groups and academics in order to develop recommendations for investment
that best meet the needs of NEST's likely membership of low to
moderate earners.
PADA's emerging thinking following consultation suggests
that the investment approach many UK defined contribution schemes
take where members are invested predominantly in the stock market
may not be appropriate for the membership of the scheme, who are
likely to have a low appetite for risk. PADA is likely to recommend
to the NEST Corporation a strategy that invests members' contributions
in a range of asset classes, such as Government bonds, stocks
and shares, cash and alternatives. This approach would be designed
to reduce volatility (sharp falls or sharp rises in the fund value)
and the risk that some individuals would get less than their contributions.
In any defined contribution pension there are, however,
no guarantees as to what an individual's final pension will be.
A variety of factors can influence pension income, such as future
annuity rates, inflation and interest rates as well as returns
on any investment. No single strategy is risk free.
DWP
January 2010
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