Otto Thoresen, Chair of NEST, commented: ‘As Trustee of a pension scheme with over 3.6 million members, our driver is, and always has been, member interests. NEST’s mission is to help millions achieve a good retirement and offering a retirement solution is a key part of that work. We have a duty to ensure our members can access their money in ways that help them achieve good outcomes and meet their aspirations for retirement.
‘Our mission hasn’t changed, but the landscape has shifted. Currently NEST provides access to small lump sums and can signpost members to annuities, but following the government’s pension freedom reforms we need to consider other options for our members.
‘There will be a wide range of pot sizes amongst our membership – even within the next few years - and research shows most people want to convert their savings into a lifelong income. Our members should be able to take advantage of the new flexibilities, whatever their pot size. For many the costs of on-going advice, for example in setting income levels each year, just won’t add up.
‘Our members, who typically are on lower than average salaries, are more likely to have modest pots. Without access to low cost solutions, they may just access cash instead. That means they won’t get the most out of their retirement savings and there’s a real risk of a two-tier retirement system, leaving NEST members worse off.
‘We believe NEST needs to be able to consider new options which will ‘do the hard work’ for our members whilst providing flexibility and security.’
NEST’s response in summary:
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Although the sector is developing innovative products for ‘mass market’ savers post Freedom and choice, very often ‘mass market’ means ‘mass affluent’ in this sector. These are people who may not have traditionally accessed complex investment products, but who nevertheless have pot sizes of £100,000 or more.
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Research shows that many people with smaller pots will lack the confidence to shop around at retirement. This may be due to a lack of understanding of financial products, made more difficult by complex products and the use of jargon. It’s also likely to be because formal advice is inaccessible or unaffordable. The advice requirement associated with retail drawdown products is likely to carry disproportionate costs in relation to the value of their pension pot.
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As a result, for a proportion of NEST members, any retirement pathway requiring them to look outside the scheme may be too complex to navigate. The absence of an appropriate income option may mean they take their pot as cash where they may not have done otherwise.
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This would effectively create a ‘two-tier retirement system’ and negate some of the positive impacts NEST would have expected to see on retirement income adequacy, as a result of auto enrolment.
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Instead, NEST believes there’s benefit in considering a specific solution for NEST members.
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Governed products on the market focus on the governance of investment decisions within funds. NEST proposes looking at using a similar model at retirement, reducing the need for advice by helping cohorts of members set and monitor access to sustainable levels of income.
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NEST also believes that any non-advised pathway would need to build in later life protection in order to ‘lock in’ income sustainability for the final period of retirement. An example is the retirement journey described in the NEST blueprint, which combines drawdown, access to ‘rainy day’ cash lump sums and putting money aside to purchase a deferred annuity or equivalent.
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