DWP blocks Nest drawdown in favour of industry innovation

The proposal had been criticised by drawdown providers as a state-backed distortion of a market which is already competitive, while consumer representatives stressed the need for greater cost pressure.

It’s important that we establish a cultural norm that’s not just ‘cash in your savings’ as we get to retirement

Tim Sharp, TUC

As part of its response to consultation, 'Nest: Evolving for the future', which ran from July until October last year, the government also confirmed it would allow and work to facilitate contractual enrolment in Nest, but not bulk transfers that are not related to auto-enrolment.

The news comes as the contribution cap, restrictions on auto-enrolment-related transfers into Nest, and on transfers out, are due to be lifted from the beginning of April.

Nest confirmed it will extend its standard annual management fee of 30 basis points to funds transferred into the mastertrust, with no entry or exit charges.

Explaining its reasoning for not allowing Nest to offer drawdown, the DWP said it had received “reassurances” of providers’ intention to innovate.

“We recognise that the retirement market is very young and we hope that development of new products will progress at pace now that the freedom and choice reforms are well established,” the response concluded.

Nest's chair Otto Thoresen welcomed the relaxation of transfer rules, but struck a more reserved tone on the refusal to let the mastertrust offer drawdown services.

“We’ll be watching market developments closely. In the meantime, we want to work with industry and will keep developing our ideas with the aim of getting members the help they need as their pots grow,” he said in a statement.

Pay the bills

When the DWP issued a call for evidence on Nest drawdown in July last year, criticism was widespread among many competing providers.

Central to those objections was the financial position of the mastertrust, which was set up in 2010 with government money.

“They’re reliant on the taxpayer,” said Kate Smith, head of pensions at provider Aegon, arguing that the set-up of a drawdown service would incur costs compared with other options.

“Our point is that rather than Nest build an income drawdown solution themselves, they should actually look to the market and develop a panel approach,” she said.

The market can cope

Nest’s most recent annual reports show that the amount it owes the government currently stands at £459.6m. The mastertrust has previously stated that it is confident of becoming self-sufficient, and the DWP is expected to provide further detail in April.

Other industry experts have questioned the assertion that Nest would distort the drawdown market.

Lydia Fearn, head of DC at consultancy Redington, said Nest’s state funding had not seen it eclipse competition in the accumulation market, and that a decumulation product would have been especially useful for small companies and self-employed savers.

“It would [also] have given larger companies and pension trusts a wider through-retirement product selection. Since these schemes have the capacity and time to align the product to their own members, Nest could have been part of that selection,” she said.

Fearn hoped the DWP would keep its promise to review its decision as Nest pot sizes grow and products develop further.

The search for innovation

The government’s consultation response acknowledged that there was “limited evidence” of innovation in the drawdown market, but said it would closely monitor developments.

Trades Union Congress pensions policy officer Tim Sharp took this further, pointing to a 2015 Which? Survey as evidence of a market in which consumers struggle to distinguish value. It found more than £10,000 in fee differences between products at the 10-year mark.

He said a Nest drawdown product would help to extend the progress made by auto-enrolment in accumulation to the decumulation market, even if uptake would be slow at first.

“It’s important that we establish a cultural norm that’s not just ‘cash in your savings’ as we get to retirement,” he said.

Maybe later

However, others felt that the small average size meant a product would simply be unnecessary at this moment in time.

For now, said Stephen Budge, principal in UK DC and financial wellness at Mercer, savers could look to development of institutional, trustee-led drawdown support to drive innovation, with the possibility of a Nest product at a later date.

“It’s not to say they shouldn’t be in that market, it’s just now’s not necessarily the right time,” he said, adding: “I think they’ve got some good ideas around how they want to structure the support of members in that period.”