It is impossible to deny that there is a large number of people in the UK who are not well served by the pensions system. What is also clear is that there is a part of the UK workforce that cannot be served by the adviser and provider community because it is not economic to do so. So Nest steps in to fill the void, with bold statements of being complementary, not a competitor to, existing provision.
Do we really buy this, or is there a very real danger that the scope of Nest will creep and take out some existing provision? The interactions between Nest and private provision are still complex and unclear, but a few of the considerations are laid out below.
Classing Nest as a success if a large number of members have come from cancelled private plans doesn’t feel much like we’ve made progress.
For employers, Nest and the wider pension reforms bring a number of considerations into the businesses that they run. How will employers know whether or not they have fully complied with the new regulations? Can employers be bothered with two lots of payroll deduction? Were all new employees given the right information at the right time? Did the opt-out process work properly? Have the correct contributions been paid based on this additional definition of earnings? Have any employees that have previously opted-out been re-enrolled? How can employers do all this with their existing schemes?
For advisers, what role do they play in helping employers with compliance around the new rules and regulations? This looks awfully like an additional governance role. For those employers not willing to pay for the compliance service, the interaction between the employer, adviser and product provider becomes critical. Advisers have a critical role to play with employees. A hands-off approach will likely lead to employees making the minimum contributions, leaving bits of pension here and there. Those employees will have no clear picture of their road to retirement. Engaging employees in their pension arrangements, making required, not minimum contributions, and consolidating pension pots (where economically right to do so) will make the picture clearer and may, only may, lead to more confidence in the pensions system. Of course, there is always the challenge of an RU64 type test, but more of that later.
For providers, the flow of information becomes critical. When do people join an employer? Has the relevant information been passed on? Has the opt-out process worked? What role is the adviser playing in helping the employer with compliance?
Classing Nest as a success if a large number of members have come from cancelled private plans doesn’t feel much like we’ve made progress
So, then we move onto the much commented Nest charging structure. Still only a proposal, but at least we’ve got a basis upon which we can model potential outcomes. At first glance, the 2 per cent contribution charge and an annual management charge of 0.3 per cent looks pretty attractive. But a charge shape of this nature is, by definition, a term-related charge. This shape of charge means that an employee with a short term to retirement, say five years, will pay an effective amc of circa 1 per cent. An employee with 30 years to retirement will pay an effective amc of circa 0.4 per cent. All fine in its own right, but making a comparison of relative value between an amc only scheme and this combined charging structure becomes very difficult indeed.
This brings me back to the RU64 test. This was introduced to ensure that personal pensions and GPPs had charges at least as good as a stakeholder plan. FSA has mentioned introducing something equivalent for Nest. But how could this possibly work in a GPP environment? As mentioned earlier, the Nest charging structure becomes term-related. Is an employer and their adviser supposed to run the test for each employee, for the average term to retirement of the workforce, or what? For me, an RU64 test in its current form is not workable.
So what conclusions can we draw about all of the above, and about how Nest can be complementary to existing provision? Quality of advice given, and the quality of the information given by providers will both help. But the fear is that employers park this in the ’too difficult’ box, and select Nest as a default.
That is likely to lead to levelling down of contributions, a lack of advice and engagement, and ultimately less retirement provision and less trust and confidence in the pensions system. This can’t be a good outcome, so we will continue to lobby for a common sense approach to the interaction of current provision and Nest. Nest just replacing existing provision is not a good outcome for anybody.
