A row has erupted over Nest’s plan to deliver a retirement income product offering members a low-cost flexible income with built-in longevity protection.
Responding to the Government call for evidence on its own future, Nest says it has no option but to develop its own mass market retirement income proposition because the industry has so far failed to start developing products for individuals with pot sizes under £100,000.
But Aegon has attacked Nest’s proposal, arguing it is symptomatic of a trend for mastertrusts to offer unregulated, non-advised drawdown. Instead of channelling all members towards a single in-house solution, argues Aegon, the Government and regulators should examine how trust-based schemes can offer access to pension freedoms.
Now: Pensions has attacked the plan as anti-competitive, arguing Nest could create a market-leading proposition at a price other providers could not compete with because of its favourable government loan terms,
Nest says a proportion of its members will find any retirement pathway requiring them to look outside the scheme too complex to navigate and in the absence of an appropriate income option may mean they take their pot as cash where they may not have done otherwise.
Nest says any non-advised pathway would need to build in later life protection in order to lock in income sustainability for the final period of retirement, citing the retirement journey in its Blueprint paper that combines drawdown, access to ‘rainy day’ cash lump sums and putting money aside to purchase a deferred annuity or equivalent.
Nest chair Otto Thoresen says: “Currently Nest provides access to small lump sums and can signpost members to annuities, but following the government’s pension freedom reforms we need to consider other options for our members.
“There will be a wide range of pot sizes amongst our membership – even within the next few years – and research shows most people want to convert their savings into a lifelong income. Our members should be able to take advantage of the new flexibilities, whatever their pot size. For many the costs of on-going advice, for example in setting income levels each year, just won’t add up.
“Our members, who typically are on lower than average salaries, are more likely to have modest pots. Without access to low cost solutions, they may just access cash instead. That means they won’t get the most out of their retirement savings and there’s a real risk of a two-tier retirement system, leaving Nest members worse off.
“We believe NEST needs to be able to consider new options which will ‘do the hard work’ for our members whilst providing flexibility and security.”
Aegon head of pension Kate Smith says: “There’s been a rapid pace of change in the retirement income market to develop innovative solutions to meet customers’ demands. It’s absolutely right that over 55s, including Nest members, should benefit from this. The quickest and simplest way to do this is for Nest to set up an in-house panel with a suite of retirement income options, including drawdown, drawdown with guarantees and annuities, allowing members to access the best in the market. By doing that Nest could capitalise on market innovation rather than build an in-house solution at taxpayers’ expense.
“One key element missing from Nest’s proposals is advice. It is dangerous to assume this isn’t needed or wanted by Nest members, leaving them to make complex retirement income decisions by themselves. The FCA and HMT’s Financial Advice Market Review is looking at ways to address the advice gap; one outcome may be that advice could become more affordable and therefore more accessible to Nest members.”
“Nest’s desire to expand into the retirement income market is a symptom of a wider market trend as trust-based schemes, particularly mastertrusts, seek to offer unregulated non-advised drawdown giving members greater choice, while retaining funds. This is a growing regulatory gap. Government and regulators should look more broadly at how trust-based schemes offer access to the pension freedoms before Nest jumps to a solution. Selecting a retiree income product is an individual decision, and shouldn’t be made by scheme trustees, which is contrary to the spirit of the pension freedoms.”
A Now: Pension spokesperson says: “We believe that allowing NEST to expand into the retirement products market fails to take into account the impact this would have on competitiveness in the market. We also believe it is unjustified as there is no evidence of market failure in the decumulation market. The provision of a loan at the government rate of borrowing gives Nest access to funds that no other provider can access. By July 2016, Nest had borrowed £470m. This loan is estimated to be repaid over a period of 20-27 years, though the DWP permanent secretary has indicated that it is too soon to say when the loan will be fully repaid.
“Nest could arguably create a market-leading retirement product at a price that no commercial provider could compete with.
“It is important that the vibrant market currently in existence is maintained so that consumers continue to have a wide range of choice and products available, but there is a risk that allowing expansion of Nest could lead to market dominance which could distort the market and would be detrimental to consumers’ interests.”