Radical Government proposals for the future of Nest could redraw the UK’s pension landscape.
Under the plans – which Money Marketing can reveal now has cross-party support – the state-backed provider would expand both into the post-retirement product market and open as a personal pension firm targeting individuals.
The wider industry warns without a sign of market failure the move will create an unlevel playing field and leave taxpayers on the hook for millions of pounds.
But others argue a national retirement provider could drive down costs for consumers, boost protection and help savers currently underserved by a market that favours the wealthy.
Behind the debate is Nest’s ever growing debt to the Department for Work and Pensions. It now stands at nearly half a billion pounds with the scheme and Government coming under growing pressure to establish a repayment plan.
When grilled by MPs, neither could not say when it would be paid off and the meagre income of just £9m a year from member charges barely makes a dent.
The DWP’s 12-week consultation fires the starting gun on changes that could see the scheme, already set to be the largest in the UK, expand even further.
The two major proposals are to allow Nest to develop its own retirement products and allow a wider range of people access to the scheme.
At the moment Nest only offers cash lump sums or annuity purchase through a restricted panel of providers.
Pensions minister Ros Altmann says the introduction of the pension freedoms means Nest’s role must be re-examined.
She says: “People now have much greater choice about when and how they use their pension savings. Retirement should be a process, not a sudden event… I think the time is right to consider how Nest might evolve to respond to wider pension reforms.”
Shadow work and pensions secretary and Labour MP Debbie Abrahams told Money Marketing Nest’s inability to offer drawdown “means its members have to shop around and be subject to more charges”.
The industry won’t like it but Nest is not tearing strips off their market, it is there for the smaller, mass-market segment
She says: “In my view, it would efficient and stress free for members of Nest to have a single accumulation and decumulation process”.
But the consultation goes further.
It suggests any product designed by Nest could be opened up to any pension savers, not just its three million-strong membership.
The document says: “It is likely that these would also be suitable for some members of other schemes, including those whose trustees are looking to signpost retirement products to their members.”
It adds people saving with the new Lifetime Isa could also be brought into scope, and be allowed to transfer into Nest at retirement.
In addition, it notes Which? research that warns people with smaller pots may struggle to access some products, including drawdown, that are designed for wealthier people.
The DWP is also considering changing rules to allow more people to join the scheme.
Currently individuals cannot save into Nest without being employed by a firm that has picked Nest, having self-employed status or via a pension sharing order.
However, the industry is fighting back.
Now: Pensions chief executive Morten Nilsson says: “Nest was established with a public service obligation using state aid funds to address the concern that there would not be enough commercial providers to serve the low-earner and small company auto enrolment market.
“Its role was to be a provider of last resort with the intention that it should complement, not compete or replace, private sector providers.”
AJ Bell senior analyst Tom Selby questions whether funding a competitor is a justified use of taxpayers’ cash.
He says: “It is up to the Government to make the case for state intervention in the drawdown market. There are other markets – such as mortgages – which it could be argued are not working for certain sections of society, and yet the Government has not felt it necessary to create a new provider using taxpayer money.
“If there is market failure in the drawdown market then intervention would be perfectly justified, but if there isn’t then people would rightly ask whether this is a sensible use of Government money.”
However, Fairer Finance managing director James Daley says: “This makes perfect sense. My biggest concern about the pension freedoms is people sleepwalk into making bad decisions.
“The thing about Nest is it lets you sleepwalk into an OK decision, that has been missing from the landscape. We are crying out for this, because most people don’t have the resources to pay for financial advice and there’s a massive risk of people squandering their retirement savings.
“The industry won’t like it but Nest is not tearing strips off their market, it’s there for the smaller, mass market segment.”
Pay the piper
On the same day the consultation launched, Nest also published its annual report, which revealed its DWP loan has risen to £460m, a 19 per cent increase on last year.
The news comes after the National Audit Office warned the scheme’s funding model was “inherently uncertain”. MPs have also raised concerns that “neither the Department nor Nest could provide a credible estimate of the time needed to repay the loan or for Nest to become self-sufficient”.
Royal London director of policy Steve Webb was pensions minister when Nest began enrolling members in 2012.
He warns the consultation is a “deeply flawed document” that fails to address whether a taxpayer-funded provider is needed.
He says: “There will be around four million people in Nest by the end, and it would seem a bit odd to look after them for 30 or 40 years and then say ‘off you go’. But I don’t think that’s a good enough reason for Nest to go into decumulation.”
Nest chair Otto Thoresen denies the plans are driven by the need to pay back the loan nor that the Government is putting Nest under pressure.
He adds: “For the defined contribution generation, their pension savings are going to have to work a lot harder. These are the people for whom a mistake, or a poor investment could be catastrophic.
“I want to be confident enough to look my other trustees in the eye and know that we’ve done everything in our power to ensure that our members can achieve a good outcome and feel confident in their decision.”
Size of Nest’s DWP loan, up from £387.1m in 2015
Income collected from members’ contribution fees and annual management charges, up from £5.8m in 2015
Santorini Financial Planning managing director Matthew Walne says:
“This makes sense in that you will have millions of people with Nest accounts. Whether they are the kind of people who will go into drawdown is debatable. For providers they are trying to protect their corner and they will not be keen on having their margins squeezed. The market is pretty well-served as it is, you are entering dangerous territory when you open things up like this. Drawdown at its core is quite complicated and to just open up a low-cost version will potentially cause more harm than good.”
Is now the right time for Nest to expand?
The current restrictions on Nest risk leaving its members without the help and support some of them need to make the most of their retirement savings. With pension freedom the rules of the game changed, so the services offered by pension providers needed to change too. Commercial pension providers have all already adapted to reflect this; Nest now needs to do this too.
In auto-enrolment, Nest was needed because it was essential that all employers had access to a pension provider to allow them to fulfil their statutory duties. By contrast, offering a drawdown scheme to members is not a statutory duty, however the alternative, to not offer the members a drawdown scheme would mean effectively only half the job had been done. It is illogical and inappropriate to take them all the way to retirement and then abandon them without a decent range of retirement income options.
Even if Nest offers an in-house retirement income solution, all its members should still be encouraged to take ownership of their retirement savings and to shop around for the best possible solution to meet their needs. Shopping around should still come first, with Nest’s default serving as a solution only for those who have made an active decision to stick with their existing pension provider.
Tom McPhail is head of retirement policy at Hargreaves Lansdown
Nest has done a really valuable job in the last four years and is a crucial part of the pensions landscape. But I think it would be premature of the Government to conclude that Nest savers will not be well served by the wider decumulation market – we just don’t know yet.
The consultation document should have been much clearer about whether they are talking about.
Specifically, it should have asked whether Nest should make a profit from decumulation products which it uses to pay back the loan sooner; or cover its costs; or subsidise decumulation products and under-cut other providers.
One argument is the loan is going to take far longer to pay off than originally thought. That is not Nest’s fault, auto-enrolment has been put back, wage growth has been lower than originally budgeted for, but we are clearly now talking about decades.
It could be that the Treasury is saying we need to bring that period forward – that is one theory. The other is there will be around 4 million people in Nest by the end and it would seem a bit odd to look after them for 30 or 40 years and then say ‘off you go’. However, I do not think that is a good enough reason for Nest to go into decumulation.
Steve Webb is director of policy at Royal London