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We need to give Nest more of a chance

Like many neutrals I’ll be hoping that Stoke City beat Manchester City at Wembley on May 14 to win the FA Cup. After all, we Brits often like to see an underdog triumph.

And when it comes to finance there is one initiative that most do not expect to come out on top – the national employment savings trust – it has been on the receiving of plenty of criticism from day one.

The latest wave of criticism is on its decision to invest in low-risk assets in the early years before moving up the risk ladder for the growth stage.

It goes against the perceived wisdom of many advisers who suggest that if you have years on your side then you should invest in higher-risk assets.

But Nest argues that the pot of money is so small in the early years that whether you invest 100 per cent in equities or 100 per cent in bonds it will not make too much difference to the total return over 45 years.

Some critics suggest that the ultra-cautious stance is designed to keep people in the scheme. I can see their point. Imagine the reaction of workers who get a pension statement one-year on to discover that they have lost a sizeable chunk of their contributions because of a market fall – they may well decide to walk.

Other critics argue that Nest is missing the point and that education is key. They believe that employees need to understand why they are investing in higher risk assets, and once they do they will be comfortable with the fact.

They have a point but the mass market is not up to engaging on the intricacies of risk versus reward trade-off. Most employees in definedcontribution schemes throw any communication from their pension department straight in the bin. Education will eventually filter through, perhaps when the first significant wave of DC members retire and realise their pension pots are not as generous as they had imagined.

I too have been sceptical of the scheme but I wonder whether it is time to give it a break, for now at least.

Nest aims to deliver a return of around 3 per cent above CPI. Those who salt away around £45 a month over the next 45 years (a total outlay of around £23,500) will get a return for an income of £5,000 a year for life. That does not seem too bad a deal (assuming, of course, that it manages to achieve this return), for the target audience who earn less than the average wage.

There was a period a few years ago when the Daily Express ran a front-page story seemingly every week warning homeowners of an impending house price crash. It was as though the paper wanted a crash to materialise, if only to say we told you.

Nest is worried that too much focus of negativity will undermine its chance of success. Britain’s pension system is buckling and something needed to be done. Nest has been years in the making and a generation of savers has missed the boat while the great and the good in the political and pension world were pontificating on how the scheme should work.

It is too late to go back to the drawing board – and it is not as though the pension industry has not had a chance of its own to come up with the answer.

I am yet to be convinced that Nest will be the answer to our pension dilemma, although the end of means-testing gives it a better chance. But perhaps we should give it a little more support. This is one underdog that needs to pull-off a victory, after all, millions of people’s retirement depends on it.

Paul Farrow is personal finance editor at the Telegraph Media Group

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Comments

There are 7 comments at the moment, we would love to hear your opinion too.

  1. Still think its a compromise too far.

    Anecdotal evidence (based on the questions I have been asked about NEST by non-advisers/pensions professionals) suggests that those who are aware want to know whether and how they can get out of it. Furthermore those who weren’t (until they heard the questions) soon followed suit.

    I think at best NEST will prove an inconveniece to the apathetic and at worst an unwelcome delay to a braver and more effective solution.

  2. This misses the point entirely. It is not the introduction of Nest that will have an impact on the savings rate, but the introduction of auto-enrolment. There is already a perfectly good (and more flexible, less costly in the early years) vehicle in place called the Stakeholder Pension. There is no need for Nest.

    Add the fact that Nest does not allow for the cost of advice (and nor will Stakeholder after the ridiculous decision to remove the ability to factor on Group Stakeholder only amongst Stakeholder products come RDR) and of course Nest will fail. Those who think they can’t afford to save will still think the same and opt-out and there’ll be no-one there with any incentive to convince them otherwise.

  3. I have carried out the calculations and, in real terms, using today’s interest rates and after the deduction of 20% tax, the NEST pensioner would receive about £200 per month.

    Pay in £45 for 45 years and draw £200 for about 20 years (on average). Not bad but hardly worth getting excited about especially when the benefits office tells the NEST pensioner that he is now disqualified from receiving any other benefits.

    The other contributor was exactly right – other than keepin another bunch of quangocrats in a job for the past 2-3 years, why wasn’t Stakeholder appropriate. It’s auto-enrolment (which existed until the late ’80’s) which will make the difference (if any) – not NEST per se.

  4. I agree with the author of the article – to a certain extent. There’s no point rubbishing NEST – it has been designed for the bit of the market that providers can’t/won’t entertain. That’s why, incidentally, Stakeholder wasn’t an option…

    NEST is actually a good concept. Providers were asked if they could provide an altenative. In short, providers could/would not duplicate it due to its low cost base and public service obligation. Whether it’s delivery is up to scratch remains to be seen…

    I really don’t think it will matter whether NEST is a success or not – if auto-ernolment results in more people saving and not relying on state benefits, even just a little bit, it will be seen as a success, whether someone is in NEST, a GPP or Stakeholder

  5. Bob Donaldson 6th May 2011 at 1:43 pm

    I don’t know how many other advisors have found that too often we are being asked to advise on schemes that individuals have provided by their employers. One recent son of a client of mine asked about the scheme their employer provided. Yes they had given them a booklet and provided details of the funds but this guy works on a golf course. Talk about grass and all things to do with golf he is fine, pensions is another planet.

    As the mother was an exceptionally good client of mine, I gave the advice (free of course cross subsidized by the mother).

    However, I carry that liability for the next 40 plus years and for what.

    If I had said I was going to charge a fee of say £300 to cover my time and the liability he could not or would not have been able to pay it.

    However, the long term impact of selecting the wrong fund or simply going into the default fund would cost him more in the long run.

    This may end up being the same case with NEST.

  6. Watching this NEST Utube advert http://youtu.be/5fOtemS5Paw
    aimed at advisers and combining it with thoughts over how Consultancy Charging does make me think that it is likely advisers and the businesses they advise will opt for NEST as a scheme operating with no contact by the adviser and then have 6 monthly or annual seimars where the emplyer’s adviser explains NEST and why if they want toi be serious about saving for retirement and their earnings are high enough, NST alone will not be enough. In that case, a fairly charged GPP with charges for the advice taken by adviser charging or something similar will be thw way forward.
    Basically, we’ve all got until Jan 2013 to try a few things out and I hope by then enough providers will have offerrings of Group ISA plans deductable through payroll ready and tested….

  7. The big problem with NEST is its interaction with pension credit. There are going to be thousands eventually reaching retirement having paid in £20 to £30k only to find that the resulting pension loses them pension credit which they would have got if they had’nt joined NEST.

    As usual the saver will get stuffed and the one who spunks it up the wall still gets his state benefits.

    NEST is a misseling nightmare in waiting unless for example the trivilaty limit is raised to say £50k. Then if a NEST member finds that he is no better off than someone on pension credit i.e been missold by the government, they can receive all their money back!

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