Nest chief executive Tim Jones has issued a passionate defence of the pension scheme following criticism of its low-risk investment strategy and claims that its charges are too high.
The controversial default investment strategy will see younger employees exposed to lower levels of investment risk in the early years of membership, a decision that goes against conventional thinking about young people’s capacity for risk.
The level of risk will be ratcheted up when members reach the growth phase of membership in their 30s.
Speaking to Money Marketing, Jones says the decision is backed by qualitative and quantitative research that shows younger members are more likely to act negatively in the face of volatility and cease contributions.
He says: “The expressed appetite for risk among young people is quite high but when they experience loss, they are much more likely to take action as a result. They do not actually behave in the way they say they will.
“When some of the younger people were exposed to absolute loss during our research, their emotions ran quite high. They saw it as theft and you have to take account of that.”
Jones insists that, because Nest’s target market consists of low to middle-income earners, the rewards for introducing volatility for members in the early stages of membership are outweighed by the risks.
He says: “When you look at the quantum of money you are trying to shoot the lights out with – which is going to be fairly small in those early years – there is no real benefit from taking on a lot of risk at that stage.
“The investment strategy is completely focused on our target market. If I were talking to a premier league footballer, I would be saying to him, ’Expose yourself to volatility’ because there is a significant upside available.
“But the choice for our membership is whether to stay in or opt out and we are clear that for those young people, it is absolutely in their interests to stay in.”
Jones is also forced to defend the scheme’s charging structure following CBI director-general John Cridland’s claim that it is “not cheap enough”.
Nest members will see a 0.3 per cent annual management charge and a 1.8 per cent contribution levy paid each time they put money into the scheme. The contribution levy is expected to be removed once the Treasury loan, estimated by the Government at £904m, has been repaid.
Cridland says the loan repayment period should be extended to allow Nest to lower its member charges.
Jones says: “The political ask was to come in with a charge below 0.5 per cent. The solution we have come up with does slightly better than that and accelerates cashflow.
“I am sure there are people who still believe it is expensive but then you have other people who say Nest should not be subsidised and it should not be allowed to upset competition in the marketplace.”
It was the inability of that marketplace to deliver a solution for low to middle-income earners that meant Nest was given the green light following the three-month Making Automatic Enrolment Work review.
Jones, a former head of retail banking at NatWest, describes Nest as a piece of “social infrastructure”, which the private sector lacked a financial incentive to deliver.
He says: “It is not that Nest is somehow cleverer than the private sector. The reason we can do this is that we have been designed with scale from the outset. “If I had gone to my old bos-ses at NatWest and said, ’I have a great idea, I am going to create a pension scheme that is going to cost hundreds of millions of pounds, is going to make no profit and which needs to get a 60 per cent marketshare in the small business sector’, it would have been a very short conversation.
“But the Government can take a different view of risk to put a piece of social infrastructure in place where the private sector, for very good reasons, cannot make a business case. I could not have made a business case for doing this in the private sector but I can in the public sector.”
Having been given the green light from the Government and started work on the nuts and bolts of the design, could Nest eventually look to expand its horizons and offer a wider range of financial products?
Jones says: “We do not have ambitions to grow the business model to do more. I use the Microsoft/IBM analogy. IBM is a full service provider of information systems while Microsoft is a shrink-wrapped software vendor and to get the full service, you work with value-added resellers.
“Nest does what it does and people like platform providers and others can be the VARs to complement Nest to bring a full offer through to clients.
“If you are a Government and you are making an intervention into the marketplace, you need to have good reasons for doing it. There is no ambition from the Government to go further than is necessary.”