Government-backed pension scheme Nest has launched a consultation on changing how it invests members’ savings as a result of the Budget reforms.
Nest says it needs to understand what options are available to members and how they are likely to behave, in order to decide how their pension fund is best invested in the years up to retirement.
It says its investment strategy is currently 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 pots. However, the reforms have forced the scheme to “reassess whether these assumptions are suitable in a new world of greater freedom and flexibility”.
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.”
The consultation paper is split into two parts – the first looks at what members want and need from their pension savings while the second part assesses the range of investment and insurance available to meet savers’ objectives.
How the different retirement income options could be delivered is not included within the scope of the consultation, which closes on 30 January 2015.
Nest says the research needs to reach a conclusion “relatively quickly” because its needs to tweak the investments of members retiring “up to ten years from now” as well as redesign member communication. It notes that once the restrictions on transfers in and out of the scheme are lifted in 2017, it may adopt members with more significant savings than it currently has.
The paper also asks whether Nest should have multiple default funds, whether deferred annuities should be offered through the scheme, and if the scheme should consider introducing risk sharing with members.
Nest chair of trustees Lawrence Churchill says: “Nest has put forward some compelling evidence in this consultation document. But we don’t have all the answers. We need help and we need to work collaboratively to develop solutions that put savers first.”