IRRI: Nest 'should be allowed' to enter decumulation market
Government-backed mastertrust provider Nest should be allowed to compete in the decumulation market from 2018 to help savers who do not understand the risks, the long-awaited Independent Review of Retirement Income has said.
The report, 'We Need a National Narrative: Building a Consensus around Retirement Income', was commissioned in 2014 by then-shadow secretary for work and pensions Rachel Reeves in the wake of freedom and choice being announced. It examines ways to boost the retirement income of defined contribution savers.
One of the report’s key points is savers need more help to bridge the divide between the inertia harnessed by auto-enrolment and the engagement needed to make good retirement decisions.
The regulator should undertake preliminary work on what a reasonable level of the charge cap should be
Shadow pensions minister Angela Rayner, speaking at a briefing before the report’s official launch, said it would serve as a platform for the Labour Party to consider the freedom and choice policies.
“There are aspects of [the government’s pension policies] that we support and can admire,” she said, citing greater support, simplicity, and unity in the state pension and doing away with some of the charges and restrictions on accessing pension pots.
“But fundamental challenges are there for our society, demographic and economic challenges,” she added.
The report makes recommendations aimed at encouraging the pensions industry to develop products suitable for the new environment. One such recommendation is allowing Nest to enter the decumulation space.
It states: “Nest should be allowed to compete in the decumulation market from 2018 to provide a value-for-money decumulation product in the same way that it has in the accumulation market. This would enable Nest to set a competitive charge and governance standards that would provide a market benchmark.”
Decumulation charge cap
The report also recommended a charge cap for some decumulation products.
David Blake, director at of the Pensions Institute and co-author of the report, said: “We recommend that, in due course, a charge cap should be imposed on a simple default decumulation product. The regulator should undertake preliminary work on what a reasonable level of the charge cap should be.”
Blake also recommended a measure to make products easier to understand for members, for example by banning deterministic projections of returns and establishing a metric for demonstrating value for money.
In the same vein, the report advocates the agreement of criteria for granting 'safe harbour' status to key retirement income products.
Blake said the regulator should establish minimum standards for design, investment strategy, projected real returns, accessibility, longevity protection and value for money. Any product meeting all standards could then be classed as a safe harbour product.
Debbie Harrison, who was senior consultant for the report, said: “It would have to be very carefully done… Safe harbour is something that generally scares politicians and regulators.”