Restrictions on NEST pension scheme should be removed "as a matter of urgency", say MPs

In addition, employees who join the new National Employment Savings Trust (NEST) should not be prevented from transferring their existing pension savings to the scheme, according to the Work and Pensions Committee.

In its report on automatic enrolment in workplace pensions, which begins its staged rollout in October this year, the Committee said that the contributions cap put companies with higher-paid employees at a disadvantage. Allowing employees to pool together small pension pots they may have accrued in previous jobs would cut down on unnecessary administration charges, it added.

"Auto-enrolment is a welcome reform that will encourage high participation in workplace pension schemes," said committee chair Dame Anne Begg. "By lifting these two key restrictions placed on NEST the Government would remove barriers that might currently prevent employers from choosing NEST as their pension scheme, as well as making it easier for employees to bring together the small pension pots they are likely to have. This will help reduce the multiple administrative charges that many people pay and help them to understand the total retirement savings they will have built up."

Pensions law expert Simon Tyler of Pinsent Masons, the law firm behind Out-Law.com, said that it was clear the restrictions on the scheme would be removed "at some point". "It's just a matter of timing," he said.

"The restrictions for NEST were introduced following lobbying from the insurance industry. Pensions providers were rightly nervous about the Government setting up a pension scheme in competition to their own offerings. However, the balance of opinion is moving from fears of unfair competition to ensuring that NEST can serve its purpose," he said.

From October, employers will have to start auto-enrolling their workers into NEST or their own occupational pension scheme providing that it meets minimum requirements. Employers will be required to automatically enrol 'eligible jobholders' aged between 22 and the State Pension age who are earning more than £7,475 a year.

Following a revised timetable issued at the start of this year the largest companies will need to begin enrolling their staff first, followed by medium and then smaller companies. All existing companies will have to have enrolled their staff by April 2017, while new employers will have until February 2018. The Committee said that the Government had taken "appropriate steps" to minimise the administrative impact of the scheme on smaller employers, but stressed that there should be no further delay in the introduction of auto-enrolment.

"We considered carefully calls for some exemptions for smaller employers. However, this would not only create significant complexities in implementation, but would also mean that pension saving would not reach employees in smaller businesses who have always been the hardest group to reach in terms of workplace pension provision and who are one of the key targets for auto-enrolment," Dame Begg said.

Dame Begg said that the current restrictions meant that NEST was unable to meet the needs of all the employers and employees who might want to use it. The report recommends that the Government remove those restrictions provided they were able to do so under European state aid rules.

The Committee welcomed the broader auto-enrolment programme, which is intended as part of a package of pension reform measures. Future reforms are likely to include introducing a flat-rate State Pension and reducing the level of means testing, which the Committee said acted as a "disincentive" to workers on lower incomes considering a workplace pension. It called on the Government to proceed with its plans to reform the system at the beginning of the next Parliamentary session.

The report also recommended the introduction of a universally-adopted model to allow employers and employees to compare pension scheme administrative fees, similar to the price comparison sites used by the insurance industry. It added that the Government should intervene if any auto-enrolment schemes applied hidden charges or ones that were poor value for money by 2013.

"Pension providers must be able to demonstrate clearly and transparently that they are offering value for money for employees who are automatically enrolled. In the insurance industry, comparison websites enable people to compare providers. Our report recommends that the pensions industry should aim to establish a similar model," said Dame Begg.