There is a school of thought which states that if you want public support for something unpalatable, you must give it a cuddly name. Hence the USA PATRIOT Act, which - largely unread by politicians, if Michael Moore is to be believed - rode a coach and horses through US citizens' fundamental privacy and rights.

And now there's a new example - the NEST. NEST, which ostensibly stands for "National Employment Savings Trust" as well as being a place where you lay all your eggs (clever, eh?), is the new quasi-mandatory pension regime for employers, which is due to launch in 2012.

NEST has the following features (thanks to this summary):

• employers must offer a pension plan that is at least as good as NEST
• employees must be enrolled into the plan automatically, although they can opt out if they want to (this is the opposite of current pension arrangements, where employees must opt in)
• NEST standard is 4% employee contribution, 3% employer contribution and 1% provided by govt
  - NEST is payable only on a band of earnings between of between around £5,035 and £33,500 per annum (in 2006/07 earnings' terms);
• there's a total contribution cap of £3,600;
• 2% of every contribution is taken as a management fee to pay pension companies back for having set up NEST
• charges will be 0.3% max.

Needless to say, this is a total recipe for disaster:

Contribution levels are too low

The contribution levels are simply rubbish. The only advantage of NEST, and it's a slight one, is that it's better than nothing. Rough calculations suggest that someone who saves for 40 years or so on the NEST level of contributions, and presuming reasonable market returns, will produce a modest pension pot that would be worth about £12,000 per year. Not bad. But markets don't always do what you expect them to do, and the final level of return might be quite different.

It's also cruel to take low-paid workers and immediately steal 2% of their contributions in charges.

It's worth noting that NEST is a crude bastardisation of Lord Turner's proposals, made through the Pensions Commission for a lower-cost pensions saving product.

Employers will level down

Because the minimum contributions are so low, many employers are unlikely to be able to resist the temptation to "level down", i.e. scrap their existing pension plan and replace it with NEST. Why pay your employees more than 4% when the law says that's all you have to do? This is especially true where the NEST equivalence tests are unnecessarily complicated - many employers will just give up.

Even worse, the pointless restrictions on pensions tax relief for 50% taxpayers give employers even less incentive to run a pension plan for all staff.

Employees will ultimately lose out thanks to means-testing

For many poorer workers, the money they save in their own NEST will mean they will lose out in benefits on retirement. While it's good to make people save for their own retirement, it needs to be recognised that benefit withdrawal is an implicit tax on savers, which is otherwise unrecognised in the NEST figures. Benefit withdrawal, even if it's at a rate less than 100%, makes the economics of personal pension savings much less attractive.

We've been here before

A long time ago, in a galaxy far far away... we had a system of pension saving, in which people paid in amounts and only those who had paid in got to draw pension benefits. Those who hadn't paid in got nothing.

It was called the state pension.

Over the years, successive governments have eroded the entitlement obligations, widening them to all sorts of people who hadn't paid in to the system. From a political point of view, these changes were understandable, but they did make a system that was economically fair into one that was much less fair. Because, letting in people who haven't paid is an implicit tax on those who have.

We didn't need to be here

There's already a great portfolio of pension savings products out there. The stakeholder pension regime sets some minimum standards for a kitemarked pension scheme, and has helped many millions access lower-cost, simpler pensions. For those that like things a bit more complex, you can get even lower cost pensions via a SIPP.

Why didn't the government just require employers to pay into one of these products instead?

Well, it's because...

The public sector always screws things up

The fundamental reason for almost all pension screw-ups is the public sector. Public sector workers are inoculated from failure - thanks to useless management and the hegemony of the unions, they're virtually unsackable. In any case, civil servants tend to get moved from one job to another every few years anyway, just to prevent them from making use of any experience they might have gained in the role.

In the DWP, it's particularly desperate, because their gold-plated defined benefit pension scheme protects them from idiotic government decisions on pensions such as NEST. How could they possibly comprehend just how stupid NEST is when they personally will never have to face up to the problems it causes?

It's probably now too late to stop NEST. It will happen, and it will cause massive problems. But it's yet another opportunity to reform pensions that has been bungled by political short-sightedness.

People who read this post also read:

• Unfair, unwanted and unnecessary – the latest pensions betrayal
• We aren’t the 99%
• Where does the Guardian find these idiots?
• A tale of two employees
• Dude, where’s my pension?

Filed under: Current issues, Politics, Regulation with tags hmrc, lord turner, michael moore, nest, pensions, pensions commission, sipp, stakeholder pensions, state pension, the decline of pensions, usa patriot act