Pensions minister Steve Webb is considering lifting the statutory restrictions on NEST in response to number of competitive schemes entering the market.

Following a question from Labour spokesman Greg McClymont in the the House of Commons this week, Mr Webb said: “Labour introduced these restraints, but the situation has moved on with unforeseen competitive developments in the market, so we need to reflect on whether we should lift them.”

Under the existing legislation, NEST members will have an annual contribution cap of £4,200 and transfers to or from the scheme are prohibited.

However, NEST competitors such as NOW Pensions and B&CE have launched schemes to the same target market, inevitably putting pressure on the government backed scheme.

The constraints on the National Employment Savings Trust were not integral to the organisation qualifying for state aid, says pensions minister Steve Webb.

Giving evidence to the Department for Work and Pensions select committee on auto-enrolment, Webb said the ban on transfers and contribution cap for NEST did however strengthen its case for receiving a £650m government loan.

He added there were no firm plans to lift the restrictions despite growing anecdotal evidence that they could lose the provider business, and the recommendation in the Making Automatic Enrolment Work Review to commit to scrapping them in 2017.

“All our modeling of NEST volumes has been based on the constrained version,” he said. “Clearly, if you take the constraints off they’ll do better, get more business and pay back the loans quicker, but it’s not necessary for the success of NEST.”

But Webb added that the economic situation had worsened since this modeling and that the competition from providers such as NOW Pensions in the lower end of the market had been potentially unforeseen (PP Online, 12 Septmber, 2011).

He said however, that the constraints had ensured the provider focused on the low-earners who were traditionally neglected by the industry, pointing to its extensive research on language and communications.

The minister added that NEST had already had a beneficial effect on the market by bringing down charges as some providers tried to compete with it on cost.

There are three tests that qualify an intervention for state aid under European Union law – there must be a public policy reason for intervention in a competitive market, the intervention must be sufficiently focused on solving market failure, and there must be a cost to the provider of doing so.

The DWP said the constraints on NEST had reinforced the arguments for state aid on the second and third points, but were not integral to it.

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