Nest chief executive Tim Jones has hit back at criticism of the Government-backed pension scheme’s spending as he calls for the industry to adopt a “higher standard of ethics” when dealing with savers.
Nest’s annual report and accounts, published in July, revealed the scheme drew down £68m in loans from the Government in the year to 31 March 2013. In total, Nest has now borrowed £239m from the state.
The figures prompted criticism from B&CE, the company behind rival auto-enrolment pension scheme ‘The People’s Pension’.
B&CE director of customer solutions Jamie Fiveash described the figures as “staggering”.
Jones says: “I believe our spending is entirely appropriate for the job we have to do.
“The reality is we need to be ready to take up to 15,000 employers next summer, and we cannot say ‘no’ to any of them. It is completely different from the world of any private provider, because they can always turn people away.
“We have already taken business at the last minute from other providers where the employer has changed their mind very late in the day.
“Nest is a start-up, but it is also a major corporate. We had to build a major corporate engine with the functionality to service businesses of all sizes.
“If I were in the private sector and Nest was a new entrant, I would have built something much smaller. But that is not the challenge I have been given and we are planning on the basis of having 3 million members by 2018.”
The first 12 months of auto-enrolment have not been without incident for Nest. The scheme was the victim of a £1.4m fraud at the end of 2012, although details of how this occurred remain sketchy.
Jones removed himself from consideration for a bonus as a result of the incident.
He says: “I am very sorry it happened and I felt it was entirely inappropriate for me to take a bonus.
“The big decision was should I resign or not, and I felt that was not the right thing to do.
“If I was completely incompetent and this had been one of a catalogue of errors then it would have been different, but I felt resigning would not have been proportionate.”
The pensions industry as a whole had to fend off criticism last month after a report by the Office of Fair Trading raised concerns about a lack of competition in the market.
Jones says auto-enrolment will shift market behaviour as savers become more informed and challenge insurers to raise standards.
He says: “I think this market is working and can continue to work but the core issue that must be addressed is information asymmetry.
“The customer knows an awful lot less about the product than is often the case when people are buying things.
“Because of this it is possible for people in the market who have knowledge to abuse that knowledge if they have a financial incentive to do so.
“This is a long cultural journey. The best way to make sure both existing customers and new customers get a good deal is for the industry to hold itself to a high standard of ethical behaviour because of the information asymmetry.
“I think there is a growing realisation this needs to happen. An industry with sounder ethics and sounder self-correction will build trust and as a result people will buy more financial products because they will be confident they are not being ripped off.”
The OFT has also urged the Department for Work and Pensions to consult on improving transparency and comparability of charges.
Nest levies a 0.3 per cent annual management charge and a 1.8 per cent contribution charge. However, it does not currently disclose how much of the AMC goes to its fund managers.
Jones says: “Within the 30 basis points there are the costs of Nest Corporation, then our oursourced deals with Tata Consultancy Services and the people running the money.
“The deal we have on the money is an undisclosed number of basis points. It is quite an interesting debate about whether we should disclose.
“I am actually quite warm to disclosing that, but we need to have a conversation with Government about doing that.”
Some advisers remain unsure about using Nest because it doesn’t have “middleware” technology to help employers comply with auto-enrolment rules.
Jones says the combination of budget restrictions and potential legal problems – Nest only has a mandate to offer a pension scheme – influenced its decision not to go down this route.
He says: “We decided to be extremely clear and relatively narrow in our proposition.
“We have a defined offer and we are not going to do the rest. So we are not going to do middleware, for example.
“I do not have the budget or the execution capability to build Nest and enter the business services market. It also wasn’t clear we could legally do it, because there is no market failure in the business services market.”
As a result, advisers will play a crucial role in helping employers who choose Nest comply with the new rules. Jones says advisers could offer this service on a “cost only” basis.
He says: “Now we are moving towards the auto-enrolment rollout with SMEs we are seeing adviser propositions morph towards providing a service for these companies.
“I have met advisers who see auto-enrolment as an opportunity to create a new business line of providing administrative support.
“One adviser I spoke to who specialises in critical illness is building his strategy around providing auto-enrolment consultation at-cost as a relationship builder to then sell other insurance products.”