The future of DC? Nest unveils retirement blueprint

There has been much discussion around what retirement will look like for DC savers in light of chancellor George Osborne’s freedom and choice reforms in last year’s Budget.

Strategies applicable to those retiring in the next few years may also become less suitable over time as pot sizes grow and new products are developed, experts have said.

Auto-enrolment provider Nest this week released the response to its consultation on the future of retirement, following publication of interim findings earlier this year.

'A retirement income blueprint for Nest's members' outlines its guiding principles for the development of retirement solutions along with details of a three-phase approach to income.

They’re saying this is what good looks like, how can we make it happen?

Tom McPhail, Hargreaves Lansdown

The first and second phases span the age ranges of around 65-75 and 75-85, respectively, in which the objective is “to maximise sustainable income in real terms” through a drawdown strategy. 

Nest said this period should incorporate flexibility rather than locking members into a set decumulation strategy.

The objective is to provide “a steady income that aims to keep pace with inflation”, tabled to be 4 per cent.

A cash fund of 10 per cent of the member’s initial pot aims to provide enough liquidity that members can make ad hoc withdrawals throughout their retirement, without having to sell out of their drawdown fund investments. 

During the 20-year drawdown period, a proportion of the member’s assets is gradually added to a later-life income fund.

This fund kicks in during the third phase, from around age 85 onwards and focuses on protecting the member from “all or most investment risk and longevity risk”. 

Source: Nest

Note: Distribution of pot remaining after 20 years equates to cumulative excess money in scenarios where there is some left after 20 years of income drawdown. Model assumes £100,000 is initially invested in the income drawdown fund with an annual income of £4,000 increasing with inflation and taking account of allocations to later-life protected income fund.

The report said: “At this point in retirement we think trading off flexibility and access for certainty will be the right balance for the significant proportion of savers.”

Preparing for the future

Mark Fawcett, chief investment officer for Nest, said the next step is to talk to the industry about making the blueprint a reality.

He said: “We want to make sure that a product or products that deliver against the blueprint are available to members at the point they need them, but for now our members’ pots are still small so there is no immediate rush.”

The solution Nest is proposing is highly complex and while it might be suitable for engaged investors with large pension pots, it seems overly complicated for the core auto-enrolment population

Morten Nilsson, Now Pensions

However, Morten Nilsson, chief executive of mastertrust Now Pensions, queried the efficacy and timing of Nest’s response.

“The solution Nest is proposing is highly complex, and while it might be suitable for engaged investors with large pension pots it seems overly complicated for the core auto-enrolment population,” he said.  

“The cost of the research and development for this is going to be significant and it’s hard to believe that this is the best use of taxpayers’ money at this moment in time.”

Tom McPhail, head of pensions research at investment platform provider Hargreaves Lansdown, said the blueprint would not apply to many of the mastertrust’s current members, but that would likely change over time.

“For Nest today the typical retirement pot is only a few hundred pounds,” he said. “This is them exploring what 'good' might look like into the future. It is a bit of a challenge to the pensions industry – they’re saying this is what good looks like, how can we make it happen?”

Blog: Five key graphs on Nest's retirement income blueprint – click here