Guidance guarantee must meet needs of new pension savers, says NEST
Automatic enrolment pension scheme NEST has today responded to the government’s consultation on freedom and choice in pensions.
Commenting on NEST’s submission, CEO Tim Jones said:
‘This consultation is an opportunity to shine a spotlight on the new generation of pension savers created by automatic enrolment. Helping them get the best possible retirement outcome is at the heart of everything we do and that’s what we’ve concentrated on in our response.
‘Our main concern is meeting the needs of these new savers in a way that offers value for money and won’t eat into their pots, which in the short term are likely to be relatively small.
‘The immediate challenge is to get a model up and running for April 2015 that is proportionate and cost-effective. We believe the most appropriate short term solution is a tightly defined guidance guarantee delivered by an independent third party. This should be funded by a levy across the financial services sector to make sure those with the smallest pots don’t shoulder disproportionate costs.
‘For the longer term, we’ll be considering carefully how best to engage and support our members to reflect their needs.’
Key points of NEST’s response:
- Automatic enrolment is a policy based on behavioural economic principles that recognise people face significant practical barriers when it comes to making informed, long-term financial decisions. In less than two years, automatic enrolment has reversed the decline of two decades in the number of people making provision for their retirement. The same behavioural economic principles should also form part of any solution that helps people make the right choices as they reach retirement.
- Tightly defined guidance delivered by an independent third party is the best way to meet the needs of the new generation of pension savers and offer value for money in the short term.
- These savers are unlikely to have built up large pots in the short term and for the overwhelming majority of those that retire in the next few years taking their fund as cash will likely be the most sensible and tax efficient option, although this will change over time.
- The guidance must not result in those with the smallest funds, who have also got the simplest guidance needs, cross-subsidising those with larger funds and more demands.
- Furthermore, engagement and take-up may be limited and the financial risks of this unknown capacity issue must be carefully managed.
- A levy across the financial services sector would therefore be the most equitable way to fund the set up and delivery of this model.
- However this does not mean that well-governed schemes should not be trying to engage members over the longer term to help improve their outcomes.
- NEST is planning to consult in the autumn on what we can do to assist our membership on the run up to and through retirement, such as through the provision of different investment journeys and post retirement vehicles. The purpose of this is to evaluate whether there is a case based on the distinctiveness of our membership for a tailored decumulation approach to be developed and if NEST can act as an informed institutional customer of significant scale in the wholesale decumulation market.
Read NEST's response to freedom and choice in pensions (PDF)