A few years ago, most us reckoned the future of auto-enrolment was NEST and when NEST published document’s like it’s “Future of retirement” it was because it could rightly claim the major stake in that proposition.
But I’m not sure how much NEST has changed things and to what extent the future of either auto-enrolment or retirement – is in its hands.
What NEST has done is create an expectation that auto-enrolled workplace pensions are not only available to all employers – but they are free to all employers. While I agree with the first part of that expectation, I question the second.
Unless NOW Pension’s consultation takes a very strange turn, NOW will be charging its customers £40pm whether they need support or not.
It is an open secret that NOW’s principal commercial rival, People’s Pension, is considering following suit. I would be surprised if we did not get an announcement on this shortly.
Which begs the question – what about NEST? NEST’s last published accounts shows it is running an overdraft with the taxpayer of some £380m, add to that the grant they have received for promising any employer (with a UK bank account) access to its master trust and NEST are £400m in the red.
NEST make great play (see diagram below) at how much cheaper their service is than their rivals (£5.40 v £15 in this example). It’s true – NEST is now looking obscenely cheap!
(of course there are other scenarios where an AMC is very cheap but the general point is good.
Why they should continue to offer NEST’s service at a loss when their principal rivals are having to charge monthly fees to protect service levels is an interesting question.
In my opinion, NEST needs to address the issue of its finances now, before the overdraft ticks up towards the £600m limit set with the DWP. I am sure that that is exactly what Helen Dean and her team are doing.
If People’s move, NEST has to move, I simply cannot see it being able to undercut the market using public (rather than shareholder) funds. NOW and People’s are mutuals, the other major providers – L&G, Aviva and Standard Life all are PLCs. Royal London is a mutual and has more or less withdrawn from the mass market and Aegon and Scottish Widows are not currently at the(se) races.
NEST is uniquely positioned and is in great danger of distorting a very well formed market. The National Audit Office is in place to determine whether public funds are being properly used and I am considering writing to them, if People’s start charging, asking them to investigate NEST’s privileged status.
Looking at NEST’s finances, it is becoming increasingly obvious that the initial estimate of 7-8m of the 10m new savers joining funded pensions – joining NEST is way off beam. We are half way through the process (in terms of new joining members) – so far NEST are just above the 2m mark, I reckon they are on target to double that number. But that is only half the original estimate.
The NEST charging structure is therefore going to have to change if it is to be on line to repay its debt to the DWP by 2050.
So it’s clear, not just from a competitive but from a solvency perspective, that NEST is going to have to address its finances.
It’s clear from the table below that a huge number of employers have yet to choose any pension so any market distortions will have considerable impact.
My understanding is that NEST has the capacity to charge its participating employers a fee. If it were to do so, it would be a major shock to the current assumptions of most intermediaries.
The assumption is that (apart from contributions), the pension is free.
In my view, all short-term subsidies on fees that are designed to increase new business, are dodgy. I asked L&G what its position was yesterday and they stated categorically that they saw no commercial need to re-apply a fee for its work-save workplace pension. I believe L&G, its business model is quite different from either NEST’s , NOW’s or indeed People’s.
Standard Life charge a fee for Good to Go. I applauded Standard for doing so and I am applauding NOW. I will applaud People’s for doing so too! Aviva’s principal route to market- via the Institute of Chartered Book- keepers, also requires upfront and on-going fees.
I have no doubt that once we have a majority of the large master trusts charging, the small ones will follow suit.
What’s changed since NEST’s original assumptions were made, is the market. Commercial providers are sticking around for 2016 and new entrants are arriving all the time (only this week I heard of two asset managers considering entering the market as master trust providers).
People have more choice than just NEST and NEST is going to have to fight for its market share (at a time when it thought it only had to open its apron to collect the business!).
So NEST is having to compete and not just offer a public service. To be competitive, NEST needs to offer a product without cross-subsidies from the tax-payer.
This is right and proper; auto-enrolment is not free to use, nor should NEST be!