DWP's consultation into the future of NEST has generated some strongly contrasting responses about whether it should enter the at-retirement product market. Michael Klimes reports
- NEST believes it is best placed to offer at-retirement solutions for its members, which are predominantly lower earners
- If it does not offer solutions, NEST is concerned a 'two-tier retirement system’ could emerge
- Master trust providers disagree, fearing NEST could become a monopoly and freeze out competitors
Since its creation in 2010, the National Employment Savings Trust (NEST) has become an established and influential player in the market. It now boasts more than 3.6 million members and at the end of March 2016 had just under £827m of assets under management (AUM). It was originally set up with a public service obligation (PSO) to accept any employer who wished to discharge their automatic enrolment (AE) duty.
But the introduction of Freedom and Choice in April 2015 has altered the landscape considerably and NEST's role within it. NEST is not only serving those at the accumulation end of the market through AE; it is also branching out into the at-retirement space as well. What role it should play has been explored in the Department for Work and Pensions' (DWP) Nest: evolving for the future consultation, which ended on 5 October.
A number of responses have produced sharply divergent views on its future role, the perceived or real threat to private competitors and if it could become a monopoly.
NEST's argument rests on the following four assumptions: its members have as much right to access Freedom and Choice as the better off members of the population; products being designed which are called ‘mass market' usually serve the top end of the market; if a solution is not designed specifically for lower earners a ‘two-tier retirement system' could emerge; that no one understands NEST's membership better than it does and so it should provide the solution.
According to its chairman Otto Thoresen, while NEST's purpose has not changed the context has, and therefore it has to move with the times. He said: "Our mission hasn't changed, but the landscape has shifted. Currently, NEST provides access to small lump sums and can signpost members to annuities, but following the government's pension freedom reforms we need to consider other options for our members."
If it doesn't offer members other options, there is risk that those who have smaller pots but might want to access them flexibly could just cash in their savings. Therefore, NEST believes it has to innovate in this area. "Our members, who typically are on lower-than-average salaries, are more likely to have modest pots. Without access to low-cost solutions, they may just access cash instead.
"That means they won't get the most out of their retirement savings and there's a real risk of a two-tier retirement system, leaving NEST members worse off," added Thoresen.
NEST also believes its membership profile will become more diversified in the near future as the pot sizes of some members become larger. It is only right that NEST should react to that, Thoresen argued. "There will be a wide range of pot sizes among our membership – even within the next few years - and research shows most people want to convert their savings into a lifelong income.
"Our members should be able to take advantage of the new flexibilities, whatever their pot size. For many the costs of on-going advice, for example in setting income levels each year, just won't add up."
However, Now Pensions and the People's Pension took a very different view in their responses to the consultation. The master trusts said they believe NEST has an unfair advantage due to support it receives from the government through taxpayer money. They argued there is no market failure in at-retirement product provision and there is no demand from NEST's membership for the type of products it is looking to offer.
The response from the People's Pension said the government should undertake a full market review before the extension of NEST's remit into the production of sophisticated retirement income products.
Its head of marketing Darren Philp said: "There is currently no market failure in either the provision of at-retirement products or bulk transfers. To give it the power to enter additional markets at this stage risks distorting them. We are all aware that the taxpayer-funded subsidised loan to NEST is growing every day, but now more than ever it needs to focus on what it was set up to do and that is support AE.
"One has to ask where will this all stop? Is the next stage allowing NEST to compete with the banks and insurers in the provision of protection, banking and savings products, all subsidised by the taxpayer?"
The government should focus its efforts on creating a quality standard that signposts good schemes and on continuing to improve the support and guidance available at retirement for all savers, he added.
Meanwhile, Now Pensions director of policy Adrian Boulding disagreed sharply with NEST's opinion about the retirement market. "NEST maintains that there aren't appropriate retirement products for savers with small pension pots, but the market is rapidly developing following the introduction of Freedom and Choice.
"We believe it is too soon to make a judgement at this stage and suggest that analysis of the market should be carried out in five to ten years, when it is also more likely there will be a demand for these products.
"A judgement can be made on the right vehicle to correct any market failure if it exists, and if necessary these proposals can be re-visited."
For the time being, rather than build an expensive in-house solution that few savers would use, NEST should use its size to negotiate the best possible deals with existing retirement income providers, he continued.
Boulding also warned about setting a dangerous precedent.
"If NEST is allowed to further engage in more activities that extend well beyond the target group of its pension state obligation, it could come to dominate the entire market due to its various commercial advantages. The absence of competition would then damage consumers' interests in terms of choice, range of products and pricing."
However, NEST's chief executive officer Helen Dean (pictured above) said: "NEST was set up to help millions achieve a good retirement. Giving our members access to appropriate retirement pathways has always been part of that. That's why we created NEST's annuity panel in 2011, to ensure our members with small pots would not be disadvantaged. The world has changed since then and we need to continue to meet our members' needs."
The Trades Union Congress (TUC) takes a fairly supportive view of NEST moving into the in-retirement product market.
In its response to the consultation it mentioned the danger of people cashing in their savings without taking financial advice. It cited research from the Association for British Insurers (ABI) that showed 300,000 people took cash lump sums in the first year of the pension freedoms. The TUC did its own analysis and found none of the 300,000 took financial advice.
It went on to say: "The combination of product complexity and consumer inertia that led so many people getting a poor deal from the annuity market has been replicated in the drawdown market."
Consequently the TUC added: "Allowing NEST members access to single or small range of default retirement income pathways would help members to navigate a particularly complex set of decisions."
Another important element in the TUC's view is that fears of NEST establishing a monopoly and undercutting other providers are exaggerated. It points out NEST is tiny, compared to Legal & General for instance, which has £746bn AuM as of 31 December 2015 while NEST has just under £827m by comparison.
TUC policy officer Tim Sharp is adamant on this point and said: "If you want to stop NEST providing such a service, then making claims about competition are not enough.
Firstly, let's remember that NEST is still relatively small compared to a number of the established pension giants. Secondly, given the well-documented problems of complexity and disparity of information that hinders savers' ability to influence the market, robust governance, not hobbling a key innovator, is the way to safeguard members' interests."
Sharp added that thirdly, it seems likely that any retirement income product that NEST produces will buy services from the wider pensions market, just as it does in accumulation.
With NEST being an influential player within the industry and the potential for this influence to grow, it is understandable the DWP's consultation has inspired strong responses.
As the size of the DC market expands with bigger pots and more savers, it is reasonable that those who have a stake in that future want to help shape it.
But the responses show there is considerable disagreement about what that future should look like and how to get there. What is clear is that what does or does not happen to NEST will have a clear bearing on what pensions will look like in years to come.
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