"Complicated" restrictions on the Government's scheme to support the millions of workers who will be automatically placed into workplace pensions must be removed to ensure its success, MPs warned today.
The initiative to tackle the pension savings crisis by automatically enrolling between nine and 10 million people into pension schemes begins this October with larger firms.
The National Employment Savings Trust (Nest) was set up as a low-cost pension scheme to help deliver the programme. But the Work and Pensions Select Committee warned in a report today that rules governing Nest made it "impossible" to meet the needs of all employers and workers.
It also said pension providers should be able to clearly show people are getting value for money by developing a similar model to comparison websites, which help consumers to get the best value from insurance providers.
The committee urged the Government to remove a ban on people transferring their existing pension pots into Nest, which it said would be "disruptive" for employees who wanted to bring their small pension pots together as well as employers wanting to operate a single scheme.
"The growing problem of small stranded pension pots needs to be urgently addressed," the report said.
It suggested caps on the annual contributions people could make into Nest schemes should also be done away with, as they meant employers with higher-paid workers could not use Nest as their single pension scheme.
The report said the caps would result in "severe complexity" for businesses.
Committee chairwoman Dame Anne Begg says: "Nest was set up to address a market failure in the pensions industry which meant many employers and employees were unable to access low-cost, good quality pension provision.
"However, the restrictions make it impossible for Nest to meet the needs of all the employers and employees who might want to use it.
"Unless the restrictions are removed, many employers will still not be able to access its low-cost pension scheme, and many of the employees for whom it was intended will not be reached."
The opposing view
But the Association of British Insurers (ABI) says changing the purpose of Nest before it had begun would be a "mistake".
Steve Gay, director of life, savings and protection at the ABI, says: "The cap will only impact those earning over £53,000 so we need to stick to the original plan of making auto-enrolment a success, then review it in 2017 to see if changes are needed, not move the goalposts just before the match is about to begin."
Auto-enrolment forms part of a package of measures which include overhauling the State Pension system, and the committee said the Government should proceed "without delay" and introduce a Bill at the beginning of the 2012/13 parliamentary session.
The report argued current means-testing arrangements were a disincentive for some people on lower incomes to save into a workplace pension.
Dame Anne says: "The Government must act swiftly to establish a simpler, flat-rate state pension.
"This will enable people to increase their workplace pension saving with confidence that they will not be penalised by losing state benefits in retirement."
Pension providers must be able to demonstrate "clearly and transparently" that they are offering value for money to people who are automatically placed in schemes, the report said.
A Department for Work and Pensions spokeswoman says it is "reflecting" on the committee's concerns on Nest restrictions.
'Use comparison model'
The committee welcomed work carried out by the National Association of Pension Funds (NAPF) to improve transparency amid concerns that employers and employees found it hard to compare pension providers' fees and charges.
The report recommended that, from 2013 onwards, the Government should intervene if some auto-enrolment schemes still had hidden charges, or charges that gave poor value for money.
The report said: "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."
Official figures have shown the proportion of people in a workplace pension has fallen below half for the first time in at least 15 years.
A "worrying landmark" of 48% of employees are in a scheme, compared with 55% when the records began in 1997, Office for National Statistics figures shows.
The NAPF has warned that the squeeze on household incomes and stock market volatility over the past year have put people off saving into a pension.
A recent NAPF study found that more than half of workers (54%) were not confident in pensions compared with other ways of saving.
Almost four in 10 of those eligible for auto-enrolment told the NAPF survey that they would struggle to pay into the scheme, while a third said they would quit the new pension.
According to Government estimates, between two and four million people will opt out of auto-enrolment, leaving five to eight million newly saving or saving more.
Michelle Mitchell, charity director general of Age UK, says: "Lifting the ban on transfers so small pension pots can be consolidated and removing the cap on annual contributions will make auto-enrolment easier and more cost effective for millions of people on lower earnings and their employers when it comes into effect in October.
"This is the biggest change in private pensions for a generation and it has the potential to transform the lives of millions of older people by giving them a chance to secure a decent retirement income."