The Department for Work and Pensions has moved the debate on charges into new territory with the unveiling of its charging structure for Nest.
At a stroke the Nest pricing model has unraveled years of government commitment to level charges as a means of enabling consumers to at least make a stab at comparing like with like. Nest’s combined charge, consisting of a 2 per cent up front charge on all contributions and a 0.3 per cent annual management charge, drives a steamroller through the stakeholder charging structure, leaving some to call for an immediate review of those regulations.
It also supports providers looking to introduce models that will fit within the consultancy charging regime planned for the group market by the
Retail Distribution Review. If Nest can levy an upfront charge on contributions, then providers have carte blanche to go about developing further
their own front end charging models. Even with this controversial upfront charge, Nest will come in at slightly less than 50 basis points for
median users.
A briefing note put out by Pada gives projections for total reductions in fund value due to charges in the lifetime of a member’s saving, in comparison to both a large scheme charging 0.5 per cent and one charging the stakeholder maximum.
This looks to be the first step in the government’s scheme to persuade us how upfront charges can be better, showing us just how expensive the stakeholder regime it has lauded for so long can work out for certain groups of savers.
Not surprisingly, for a 25-year-old with a short period of saving at 25, stakeholder eats up a massive 58 per cent of fund value over a saving lifetime, compared to Nest’s far more acceptable 13 per cent, and that includes the 2 per cent front end charge.
Under Pada’s projections, Nest wins out on charges for those who start at age 36 and 45, those with a full savings history, those with caring breaks and those who switch to other schemes. The one group where Nest loses out is for those commencing a short period of savings at 60, and then by not much more than 2 per cent.
We can expect to see more graphs of this sort from Pada and the government as it promotes the Nest charging structure, paving the way for
providers to make their case for their own front-end charge structures as well.
The Government has revealed that it expects the 2 per cent charge levied on contributions to Nest to last until around 2030. Some advisers believe the fact that the upfront charge is being levied to pay for a government loan to fund a software project will put some people off the scheme. In a written answer to a parliamentary question that was published in Hansard on the day of the Budget, pensions minister
Angela Eagle said: “We anticipate that the total loan period, including the years in which Nest borrows from Government and the subsequent repayments, will last in the region of 20 years.”
For early Nest savers, the contribution charge would then be levied for between 14 and 18 years, although the contribution charge could last for
more or less time than this, depending on factors such as how many people join the scheme and pay the charge.
Paul Macro, senior consultant at Towers Watson, says: “Psychologically, it may be very difficult for people to accept that £2 out of every £100 they save will be siphoned off to pay back a Government loan before it is even invested. While it’s only those close to retirement who are likely to face overall charges on the scale that Nest was set up to avoid, the general communications challenge will be much wider.
“It won’t help to allay people’s suspicions that the Government said nothing about how long the contribution charge would last when the charge
structure was announced and smuggled this information out when all eyes were on the Budget.”
At a stroke the Nest pricing model has unraveled years of government commitment to level charges as a means of enablingconsumers to at least make a stab at comparing like with like
With the government firmly in the front-end charging camp, providers will feel more confident about developing and promoting what they have
to offer in the consultancy charging space (subject to details from the FSA unavailable at time of going to press).
Steven Cameron, head of business regulation at Aegon says: “A combination charge is the best way to reduce the timing mismatch between income from charges and costs incurred while also being fair to members. We are pleased DWP has recognised this. It will reduce the amount the scheme will have to borrow and the time taken to break even. It will also reduce the risk of additional tax payer subsidy if initial opt out rates or longer-term persistency differ from assumptions.
“A combination charge is also in line with the general move away from mono-charge structures in the pensions market today.”
Now the debate has moved on, advisers and providers are in a position to grapple with the next stage of the debate – how to make front end
charges palatable to the public and the media.
