American Express coined the phrase and it’s unlikely that PADA (the fore-runner) to NEST could ever have anticipated running a premium product. But that is what NEST is about to become.
The launch of a free transfer service which allows NEST members access to outstanding fund management and first rate administration for 0.3% pa, has introduced the outstanding financial bargain of 2017.
But like American Express, NEST is an exclusive product. You can only access this bargain if you are using a workplace pension where your employer has chosen NEST or if you are self employed.
From April this year, the restrictions on NEST will be lifted, allowing it to take individual contributions up to the annual allowance (between £4,000 and £40,000 pa depending on your circumstances). This will make NEST a product appropriate for the needs of the high earners as well as those on modest means.
Coupled with the amazing free transfer/ultralow transfer management charge and NEST suddenly looks like the aggregator of choice , not just for its intended audience, but for all those people who qualify for the American Express platinum service.
How ,you might ask, can this done? Well the full story on that’s in yesterday’s blog, but in summary, NEST has access to £600m of capital – £500m+ of which has already been drawn down, these privileges are paid for at the expense of the repayment of the loan from Government.
The market impact
It will only take a perm from Mail on Sunday/Paul Lewis or the Money saving expert to bring NEST to the attention of the savvy investor.
For one thing – it will make membership of NEST for the self-employed a very attractive option. As a mastertrust operating “relief at source”, even the self employed with modest (declared earnings) can establish NEST as an attractive retirement savings plan with full tax-relief claimable through self-assessment.
But now NEST is more than that, it is a turbocharged investment vehicle with a transfer-out facility if you feel the need to access your pension freedoms in ways beyond NEST.
The professional self-employed will be the first to cotton on. If I was running a SIPP, I would feel seriously threatened by an aggressively marketed NEST (marketed as the Pensions Minister appears to be doing himself).
Once the self-employed pros have got their teeth into NEST , look out for NEST being offered as an executive pension for those who have run out of headroom for substantive contributions but who want a safe home for their retirement savings.
Finally, we may see NEST actively competing for Zombie occupational DC schemes (including the master trusts that can’t make the new rules introduced in the forthcoming Pension Schemes Bill).
In short, NEST has now got the potential to be used against the established pension industry- powered by its enormous financial capability (see below).
Will NEST eat the market?
People are resistant to handing their savings to a quasi-Government body and (let’s face it ) NEST is not a vanity play that you can discuss over a glass of Sauternes on the terrace. NEST will not give you that warm glow that you get when your financial adviser talks you through the progress of your SIPP , or when you get that invite to the AJ Bell box at the cricket.
But there are a lot of very shrewd judges out there, who well know that the cost of managing a balanced portfolio with a clear investment objective and sound investment governance is high. Add to this the security of having a premium investment and benefits administrator, together with high-quality investment reporting and you can see NEST becoming a rival to the premium cost wealth management services.
NEST should be on the menu of benefits of any flex-platform as an executive perk. NEST could cannibalise existing workplace pensions offering what amounts to an individual buy-out service. I will be petitioning First Actuarial to offer a NEST alternative to my workplace pension!
But – and here there is a but, NEST is now competing with the wealth management industry, the pension consultants – most of whom run premium master trusts and of course with the financial advisers who are keen to keep skin in the game.
Here is the rub;
NEST does not pay commission
With no obvious way for intermediaries to collect their fees from member’s funds, NEST is likely to be ignored as an investment option by most advisers.
This will bring up an awkward conversation when an adviser is asked whether funds can be removed from an existing platform, which may be paying the adviser 1%pa of funds under advice to NEST (where no such payment is possible).
Similarly, the Mercer, Aon , WTW, Xafinity, Goddard Perry, CBS, Hargreaves Lansdowne, True Potential and Intelligent Money workplace pensions, pay those consultancies fund-based management fees. These fees will come under pressure from NEST’s ultra low fee structure and from NEST’s stellar investment performance since it launched.
How will this play out?
Potentially, the NEST transfer offer could create a feeding frenzy amongst those with DC pots of whatever size.
Whether this feeding frenzy happens is dependent on the advice put into the market and the capacity of financial advisers to convince their customers to stick with what they’ve got.
As a consultant, I see NEST as an employee benefit – a premium product at a ridiculously low price.
As an investor, I see the chance of giving my money to the NEST investment team in return for such a low-charge as the first serious challenge to my L&G workplace savings plan.
As an employer, I am going to seriously think of NEST , at least for my staff who qualify for the American Express Platinum Service.
That’s what a £600m loan can buy you!