David Prosser: High initial fee means Nest could be empty

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The Independent Online

Outlook The launch of the National Employment Savings Trust (Nest) in two years is a cornerstone of the pension reforms proposed by Lord Turner: a low-cost fund into which everyone working for an employer without an existing retirement scheme will be automatically enrolled unless they choose to opt out.

However, the pricing of Nest, announced by the Government this week, is a disappointment. The 0.3 per cent annual management charge is reasonable, but there will also be a 1.8 per cent initial fee, to cover the cost of launching Nest. That fee will be abolished once Nest is up, running and self financing, but Nest warns that may take as long as 20 years.

The initial fee is a problem for two reasons. The most obvious is that it will be a drag on the savings of those who pay it. For every £100 invested, only £98.20 will end up in the pension pot and the effect will be magnified once you take into account investment returns.

The second danger is that the initial charge reduces the attractiveness of Nest to employers. It is hoped the scheme will attract between 3 million and 6 million members but the charging structure was always going to require the largest employers, contributing the most workers, to subsidise the smallest. Were only those larger employers enrolled in Nest, it would be possible to have lower fees.

What if, now that larger employers know they must provide staff with access to pension provision, they choose to exploit their size to find a cheaper deal than Nest? That would undermine the model on which the whole endeavour is based, reducing the all-important economies of scale that mass membership will bring. It would also require Nest to maintain its initial charge for even longer.

Nest is sensitive to these worries. The 1.8 per cent fee unveiled is lower than the 2 per cent proposed in March. Its low annual charge should benefit savers who stick with it for the long-term rather than opting out after a short period. Still, this is an experiment on which the jury remains out.