Government-backed pension scheme Nest has launched a consultation on how it communicates with members and invests their savings following the Budget changes.
Pensions experts have welcomed the wide-ranging consultation, saying it is the kind of in-depth document the Government should have produced before unleashing the freedom and choice reforms.
Independent pensions consultant John Ralfe says: “It puts the politicians to shame as it should not have been produced by Nest, it should have come from the Treasury and been the start of the process.”
Trade Union Congress pensions policy officer Tim Sharp agrees. He says: “The research shows how difficult and complicated it is to devise a new system and how irresponsible it was of the Government to throw a hand grenade into the system.”
Nest says it needs to understand what options are available to members and how they are likely to behave to decide how their pension fund is best invested in the years up to retirement. Its investment strategy is based on the pre-Budget assumption that members would take 25 per cent of their fund as cash and buy an annuity with the remainder of their pot. However, the reforms have forced Nest to “reassess whether these assumptions are suitable in a new world of greater freedom and flexibility”.
The evidence gathered by Nest found people “want it all”. Members want guarantees and lump-sum options but Nest warns “many savers are unlikely to have enough savings to meet this demand”.
Nest chief investment officer Mark Fawcett says the Budget reforms are a “once-in-a-generation chance” to work out “how to make defined contribution savings work in retirement”.
He says: “The old binary debate between annuities and drawdown is no longer relevant. Instead we have an opportunity to look at how elements of each might be used to create more flexible solutions fit for the majority of savers.”
Sharp notes the discussion taking place around risk-sharing collective DC schemes. He says: “You can see a strong argument for Nest pioneering CDC in the UK as they allow pooling and sharing investment and longevity risk. You can see how that would benefit Nest’s saver base.”
Although the consultation is specific to Nest’s membership base – typically low earners – Sharp says Nest tends to set the standard for the rest of the industry.
Nest assistant director of investment Paul Todd adds: “Nest had a target market before of people who were ‘unpensioned’. They look different from the people who are pensioned but as auto-enrolment rolls out, there won’t be any difference.
“People on £40,000 have similar reactions to things like market risk so we’re seeing things becoming closer in the future. Apart from the extremely wealthy end of the market, the findings will be universal.”
Key points of Nest’s ‘Future of Retirement’ consultation
The consultation covers a wide sweep of pensions issues, including: what members want and need from their savings, the design of default investment funds, the role of various types of annuity and drawdown and whether Nest should consider sharing risk with its members.
It includes examples from international pensions markets, such as US schemes that offer members guarantees in the accumulation and retirement phases. Methods for delivering various retirement income options are not included.
Nest says employees are more likely to combine pension income while continuing to work later. Pensions wealth also needs to be expanded to include provision for long-term care. The consultation closes on 30 January 2015.