Charges could deter low-income Nest savers

LOW-INCOME workers could be deterred from saving into the government's new workplace pension scheme by the charges that were announced this week, experts have claimed.

Investors in the National Employment Savings Trust (Nest) will pay a 2 per cent charge on contributions and 0.3 per cent annual charge on their funds, the Personal Accounts Delivery Authority revealed. Under the scheme, to be phased in from 2012, workers aged over 22 and earning more than 5,035 a year will be automatically enrolled into their employer's existing pension or into the Nest scheme, with the right to opt out. Nest, aimed at giving more workers access to a low-cost pension, will require minimum employee and employer contributions of 4 and 3 per cent respectively.

The 2 per cent charge is set only for the first few years to cover the costs of establishing the new scheme. Jeannie Drake, acting chair of the Personal Accounts Delivery Authority, which is responsible for delivering the scheme, said the charges were in line with those "in a very large employer scheme, or those that a very high income person can achieve".

But some in the industry claim the dual charge would undermine the initial success of the scheme. Nigel Peaple, director of policy at the National Association of Pension Funds, said the charge was more than workers in the typical large company scheme would pay.

"We shall be urging the trustee body, when established this summer, to consider carefully whether the proposed charge strikes the right balance between upfront and ongoing charges," said Peaple. "High upfront charges might discourage saving in the scheme."

John Lawson, head of pensions policy at Standard Life, said early savers into Nest would be paying more than they would for comparable pension schemes. "Short stayers will get a better deal from single charge schemes but from a commercial point of view, Nest will be able to recoup its initial capital expenditure more quickly."

But Tom McPhail, head of pensions research at Hargreaves Lansdown, said the charging structure was fair, as the scheme would need to accommodate low and unpredictable contribution levels.

"The only alternatives – to not recoup the set-up costs at all, or to recoup them through the annual management charge – would have been unfair to taxpayers or would have resulted in complex projections based on anticipated membership and fund values extending far into the future."