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17 March 2015

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NEST publishes six principles for meeting needs of new generation of savers

NEST has published six principles for the design of retirement income products to meet the needs of the new mass market of defined contribution savers.

These guiding principles represent an interim response to NEST’s consultation on future retirement options following the introduction of new pension freedoms and are based on evidence and responses from around the world.

Evidence from the consultation suggests that consumers are responding positively to the flexibility being offered by the new freedoms. There is also an emerging consensus that a significant majority will need to be offered high quality default pathways to achieve good outcomes.

The guiding principles NEST sets out represent key areas of broad agreement on product development for default offers. These are based both on evidence presented in responses to NEST’s consultation and emerging insight from other organisations.

Commenting, Mark Fawcett, NEST chief investment officer, said:
‘The new freedom and choice reforms provide a great opportunity to deliver innovative solutions for millions of savers who will be increasingly reliant on DC pots. What we are seeing is a strong consensus emerging on good quality default retirement income solutions playing a central role in helping these savers achieve better retirement outcomes.

‘Much of the evidence we are analysing indicates broad agreement that helping savers mitigate the risk of outliving their savings will be a key feature for default solutions right for the DC-dependent generation.’

The six principles for designing retirement defaults for auto enrolment savers are:
1. Living longer than expected and running out of money is the key risk in retirement and a critical input into retirement income solutions
2. Savers should expect to spend most or all of their pension pots during their retirement
3. Income should be stable and sustainable
4. Managing investment risk is crucial as volatility can be especially harmful in income drawdown-type arrangements
5. Providers should look to offer flexibility and portability wherever possible
6. Inflation risk should be managed but not necessarily hedged

NEST will be publishing a full consultation response later in the year.

Key facts about NEST:
• The government is currently introducing reforms that mean most employers will have to automatically enrol workers into a workplace pension scheme that meets or exceeds certain standards. They’ll also need to make a minimum contribution for many of these workers.   
• NEST, set up as part of the reforms, is a national defined contribution workplace pension scheme available to all employers to use to meet their new duties.
• NEST has a public service obligation to accept any employer (whatever their size) who wants to use the scheme to meet their duties.
• NEST is designed around the needs of people who are largely new to pension saving, with clear communications, low charges and easy online tools and services. It is run as a trust-based scheme and the Trustee has a legal duty to act in its members’ interests

NEST’s investment approach - key features:
1. unique default option comprising of 47 single-year target date funds, risk managed for each year of retirement
2. focused fund range including Ethical, Sharia, Lower Growth and Higher Risk options with the same low charge as the default
3. sophisticated risk management driven by innovative investment techniques, high quality analysis and transparent governance  
4. cost-efficient delivery of bespoke solutions powered by leading global fund managers
5. clear investment communications designed with and for members, employers and their advisers.