The dust has settled on government's call for evidence on the expansion of Nest into the drawdown market, but it seems the war of words between industry professionals is far from over.
The consultation, entitled 'Nest: Evolving for the future', has run since early July and was extended until October 5 in order to gather as many views as possible, and opinion is far from united.
It’s in the country’s interest, never mind any industry's interest, that Nest is successful
Brian Henderson, Mercer
Some have argued that Nest’s members will benefit from the option of a ‘through-retirement’ service despite their small pot size, while others contend that there is not sufficient evidence of market intervention to merit a state-backed entity distorting competition.
Do Nest savers need drawdown?
Key to the debate is whether or not Nest members would actually use its proposed drawdown offering. Introduced as an accumulation provider of last resort to accompany auto-enrolment, many of its members have small pots, making drawdown solutions inappropriate.
Morten Nilsson, chief executive of mastertrust Now Pensions, said: “If I look at our membership, which is very similar to Nest’s, our members just don’t have the funds, for the foreseeable future, where it will make sense to have these types of products.”
While he agreed that pot sizes may continue to grow with the continued success of auto-enrolment, he said the difficulty of predicting the economic landscape in 10 years' time meant designing solutions now would be “dangerous”.
He added that Nest members could reach "an equally good point if you actually... use all the negotiating power that Nest has to negotiate a good deal with other providers.”
Others highlighted that a ‘through-retirement’ approach with a large drawdown provider could avoid costs involved with transferring funds and capitalise on inertia.
Moving with the times
But Nest’s own argument for expanding its remit is much simpler. Mark Fawcett, chief investment officer and executive director of the trust’s investment and member proposition programme, said Nest has previously offered decumulation services such as its annuity panel, and more recently uncrystallised funds pension lump sums.
“That mission hasn’t changed but the landscape has, and we’ve got to change with it,” Fawcett said.
He explained that Nest would develop a drawdown offering designed specifically to work with small pots, aimed at providing a level of income security for savers who would not normally be served by the market.
“Despite the fact that pots will generally be smaller than that, they still want an income, and we know that they’re unlikely to go out and buy an annuity, and so there’s a real need for them to have access to a good value product that delivers a sustainable income,” he said.
Mastertrusts fear market distortion
However in demand or otherwise Nest’s drawdown offering might be, concerns still remain over the distortion of competition that could be brought about by a state-backed entity operating in the market.
Nest was set up using taxpayers’ money provided by the Department for Work and Pensions in the form of a loan. Over the summer it was announced that its outstanding repayments now stand at £459.6m.
Last year, parliament voted to lift restrictions on bulk transfers into Nest in April 2017, marking a significant shift away from its ‘provider of last resort’ brief.
For Darren Philp, director of policy and market engagement at mastertrust The People’s Pension, creating a Nest drawdown option would be “manufacturing product”, a commercial move designed to help it win new business.
“Developing a commercial proposition around this which is funded by a government loan... is to actively and aggressively compete for transfer business once the bulk transfer restriction has been lifted,” he said. “That then leads to quite a huge market distortion, and where does it end?”
Improving Nest's sustainability
Brian Henderson, who is head of UK DC and workplace savings at consultancy Mercer, said: “I have some sympathy with [Nest introducing drawdown], but equally it should ultimately be a fair fight out there.”
Should Nest expand into decumulation?
Royal London's Steve Webb gives his view on whether Nest should enter the decumulation market.
He also questioned the need for drawdown among Nest’s membership, but welcomed any move that might improve the commercial sustainability of the state-backed trust.
“It’s in the country’s interest, never mind any industry's interest, that Nest is successful, and we’re supportive of that,” he said.
However, Henderson qualified this by noting that any expansion should improve Nest’s ability to repay its loan: “[This is] fine, but who pays?”
