A consultation on whether Nest should develop and offer a full range of decumulation services and be made available to individuals without an employer has been launched by the DWP.
Nest currently only offers its members the choice of a cash lump sum or annuity purchase from a limited panel of insurance companies. Offering drawdown functionality would go beyond its current statutory objectives and could face legal challenge on the basis it breaks European laws on state aided organisations competing with commercial entities.
Last year Nest floated the idea of a three-tier retirement income strategy comprising a cash account, a trustee managed drawdown and a deferred annuity
In launching the current consultation the DWP points to its own recent research that showed nearly half of respondents still want to be working between the ages of 65 and 70, and 39 per cent do not want to retire in the conventional manner but would prefer a period of part time work before fully retiring.
Pensions minister Baroness Altmann says: “The pension freedoms introduced by the Government last year increased options as to what people can do with their DC pension pots. People now have much greater choice about when and how they use their pension savings.
“Retirement should be a process, not a sudden event. Providers need to engage people with financial planning, and develop products that will better suit the changing nature of retirement, that don’t just provide low-cost flexible options for the few but offers solutions for the many, regardless of their total pension wealth.
“To me, pensions are all about people. It is people at the end of the day that need to live on a pension. The future is about helping make pensions work better for everyone while they are working, earning, saving and when they want to access some or all of those savings.
“This is why I think the time is right to consider how Nest might evolve to respond to wider pension reforms. Nest must continue to be a good quality, viable scheme that can meet the needs and aspirations of its members throughout their lives.”
Nest chairman Otto Thoresen says: “We welcome today’s call for evidence, and its focus on enabling Nest members to achieve good retirement outcomes in the new freedom and choice world. As trustee of a pension scheme with over 3 million members, we believe we have a duty to ensure our members can access their money in ways that work for them.
“Nest was set up in a world where most of our members were compelled to annuitize. Nest now needs the flexibility to develop and deliver different approaches, to give our members real choice within the new freedoms and to recognise that working patterns are changing fundamentally. Allowing savers to continue contributing and drawing from their pension pots within a trust-based framework, providing guidance and support for accessing retirement products within schemes and from the open market will be key to promoting confidence in saving and promoting confidence in retirement.”
Hargreaves Lansdown head of retirement policy Tom McPhail says: “This call for evidence makes sense. The current restrictions on Nest risk leaving its members without the help and support some of them need to make the most of their retirement savings. With pension freedom the rules of the game changed, so the services offered by pension providers needed to change too. Commercial pension providers have all already adapted to reflect this; Nest now needs to do this too.”
“Nest has an opportunity to pioneer new ideas around the provision of drawdown for lower value and financially disengaged investors, as well as innovative solutions to the challenges of longevity insurance, through the use of deferred annuity type products.”
AJ Bell senior analyst Tom Selby says: “There is a serious sense of mission creep about the Government’s proposals to expand Nest into a new state-backed open market individual pension provider in an already competitive market.
“Nest was set up to deal with a clear market failure in the pensions accumulation phase – namely that the insurance industry was unwilling or unable to serve the automatic enrolment market, and particularly those with small pots.
“While it would be good for existing Nest members to have access to a drawdown solution in the wake of the pension freedoms, it is questionable whether there is a market need for a wholesale state-backed individual pension and drawdown provider.”
