Should Nest expand into decumulation?

Should a heavily taxpayer-subsidised provider be encouraged to move into new markets before it can stand on its own two feet?

Nest was originally created to make sure employers of all shapes and sizes were guaranteed to be able to find a provider to help them fulfil their auto-enrolment duties.

It operates under a number of constraints. There is a cap on the amount that people can contribute to a Nest pension and a ban on transfers in and out. These restrictions will both be lifted in April 2017.

But Nest has an additional constraint, which is that it only helps people build up a pension pot, it does not provide ‘decumulation’ products such as annuities or drawdown accounts. A key question for this consultation is whether that restriction should be relaxed.

On the face of it, why would anyone object? Nest already has more than 3m customers, many of them on modest incomes, and if it can provide them with a good way of building up a pension pot, why should it not expand to offer them other financial products at and through retirement?

Taxpayer support

In answering this question, it is important to remember Nest only exists because of extensive public subsidy. To set up the infrastructure for a large pension provider from scratch requires a large amount of upfront capital. 

Nest has been able to borrow on much more favourable terms than its private sector rivals. And it now looks as though that initial subsidy is going to last for much longer than expected.

According to parliament’s Public Accounts Committee, the total amount loaned to Nest as at March 31 2015 was £387m. The Nest annual report for 2015-16 shows a loss in that year of around £80m, with projected losses of £93m in 2016-17 and £109m in 2017-18. Assuming that all of this is borrowed from the government, the total outstanding loan would be two-thirds of a billion pounds, with more borrowing to come thereafter.

This raises a fundamental question, and one which is not even mentioned in the DWP consultation paper: should a heavily taxpayer-subsidised provider be encouraged to move into new markets before it can stand on its own two feet in its core market?

Most people would accept that it was legitimate to subsidise Nest to deal with a potential market failure on the supply side of automatic enrolment. There are plenty of small employers with low-paid workers who would simply not be commercially attractive to existing providers. The existence of Nest ensures these firms and their workers have somewhere to go.

Too much, too soon

But it is much less clear that there is a similar market failure when it comes to what people do with their money at retirement. The new pension freedoms have only been in place for 18 months, and many providers have spent much of that time simply making sure they can comply with the law.

But those same providers are now working on product innovations to better serve the 300,000 people each year who are looking to do something with an accumulated pension pot.

It is therefore much too early to say that the needs of these savers will not be met by the market, and that we need a state-subsidised provider. And there is hardly a ‘burning platform’ here. Nest’s own annual report shows that the average Nest saver has a tiny pot of less than £300, and it is hard to believe that such customers have an urgent need for a new drawdown product.

Nest has made a vital contribution to the success of automatic enrolment and has served parts of the market which would otherwise have been underserved. But it should concentrate on its core mission unless and until there is clear evidence that there will be a sustained gap in the supply of quality at-retirement products for those with modest pension pots.

Steve Webb is director of policy at insurer Royal London