The DWP has asked whether Nest should be the default provider for millions of small pension pots. Are they mad?
Just before Christmas, the Department for Work and Pensions issued its promised consultation on short service refunds and small pension pots under automatic enrolment.
The consultation looks at various options, one of which is to set up an aggregator scheme. The general idea is that when someone leaves an employer, any small pension pot could be automatically transferred to said scheme but any ongoing regular premiums would be paid to the new employer’s pension scheme.
There are many issues with aggregator schemes so I do not support the concept but what particularly concerned me was the question raised on page 38 of the consultation: “What are the advantages of Nest acting as the aggregator scheme?”
In my view, it is a no-brainer. There are no advantages to Nest acting as an aggregator scheme.
There are established pension providers already and new mass-market providers are entering the fray. All providers will aim to provide low-cost pensions, so why should Nest be singled out to receive potentially many millions more than anyone else? Nest getting all this extra money would mean that providers will not get it and that will affect profits. This could lead to Nest gaining an unfair competitive advantage as providers seek to retain profitability by increasing charges.
’It is a no-brainer.There are no advantages to Nest acting as an aggregator scheme’
Individuals who have workplace pension savings and small pension pots may not have even heard of Nest. These individuals could see their small pot being automatically transferred to something they know nothing about. And then they could get two sets of information – one from the current employer scheme, and one from Nest – causing confusion.
Does Nest want the business?
I can’t say for sure – it is up to them to work that out. But there are some salient considerations. If Nest gets all these small pots, with no associated regular premium, this will put pressure on both its administration and its pricing model.
In general terms, small pension pot transfers alone are more expensive to run than small pension pot transfers with a regular premium as well.
Just to make it perfectly clear – using Nest as an aggregator of small pension pots is only one of the many options discussed in the consultation. Other options include pension pots following people from job to job which makes far more sense but will, of course, raise issues of its own.
Responses to the consultation are invited before March 21 and the final rules are expected as soon as 2014. We will be putting together our official response soon. Needless to say, it is highly likely that our response will not support Nest as an aggregator scheme.
Jamie Clark is business development manager at Scottish Life