Kim Kaveh speaks to industry experts about what could be in store for the UK's default auto-enrolment provider.
NEST's place in the market is clear - to make sure that every employee that meets the requirements of UK pension rules has access to a scheme. Set up to facilitate the auto-enrolment (AE) regime, the not-for-profit organisation has secured more than seven million members, 680,000 employers and £4.1bn of assets since 2012.
Now, along with other master trusts wishing to continue operating in the market, NEST has applied authorisation to The Pensions Regulator (TPR) - as part of a regime that kicked off last October. But unlike other UK defined contribution (DC) master trusts, NEST is the only one that is funded by the government.
For this reason, as First Actuarial business development director Henry Tapper points out, the future for NEST looks "extremely bright". He explains the master trust can "spend what it likes" and its loan from the Department for Work and Pensions (DWP) could "theoretically be extended".
Government projections in 2017 showed NEST will not pay off its loan until 2038. Its debt to the DWP will hit £1.2bn in 2026, at which point it will break even.
It is possible that after it pays off its loan, its position in the market could change. Although, the master trust has told PP that selling it off is not something it is looking to do. Pensions and Lifetime Savings Association chairman and PTL managing director Richard Butcher adds he "does not see the current model is going to change dramatically" and if NEST were to be sold off it would be "contrary to its ethos".
But the long-term prognosis could be difficult to call. Butcher continues: "It may potentially be spun off at some point in time, I guess as some sort of mutual insurer; I can't imagine the government would sell it to just anybody."
Furthermore, NEST has a "different game to play" and is an "exemplar as they are driving changes in the market that have been generally positive", adds Butcher.
NEST has plans to unveil various innovative initiatives, which could set the agenda for the rest of the industry to follow. For example, as Butcher points out, its work on the sidecar has been "really interesting".
NEST rolled out its sidecar savings trial last November and revealed the organisations that would be taking part in the research. The sidecar savings model will split contributions between a pension pot and a ‘rainy day' fund, in an aim to improve short-term financial health. It is expected to unveil its findings from the sidecar in due course, though could not yet provide PP with further details.
As noted in its corporate plan unveiled last year, the master trust will aim to deliver a targeted approach to increasing member engagement, including at-retirement, while continuing to focus on ensuring the right retirement products exist to meet their needs.
Its director of strategy Zoe Alexander also told PP that once the loan is repaid, in a scenario when it is a profitable organisation, it will return profit to members in the form of lower charges but noted this is a "long way off".
Its annual management charge is set at 0.3% on the total value of a member's fund each year. The master trust is free for employers to use with no charges to set up for ongoing administration.
But other master trusts could drop their charges and significantly improve their proposition, such that the commercial market could have a competitive advantage.
The lower charges approach has already been adopted by The Peoples' Pension, which is overhauling its charging structure to a banded structure that could see members being charged as little as 0.2%.
However, Tapper points out that as long as NEST has an "open cheque book from the DWP, it will see limited competition".
The master trust has a contribution charge of 1.8% on each new contribution into a member's retirement pot, but this is not really hurting it in any way.
Tapper adds: "Very few people only don't invest in NEST because only 98.2% of the money is invested."
Alexander welcomes the competition. "I think we're looking at all the same things as other people are looking at. We stand alongside other really good, well-run value for money schemes and if they're doing things like lowering charges that's fantastic as it offers better value for money for members."
What does the future hold for NEST? This is too difficult to call, although it seems pretty likely that its model will not change drastically. But one thing is clear - the master trust will continue its mission to innovate and engage its members so they can enjoy a healthy retirement.
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