NEST gets us thinking
Gavin Perera-Betts work for NEST, he’s the chief customer officer – the person charged with helping people get the most out of their savings and he’s the author of NEST’s recent response to the Government’s Select Committee for Work and Pensions (Frank Field’s committee).
Reading about this response, I’m struck by what a difference it would make to BSPS members wishing to take their CETVs, if there were “guided pathways” for them to follow. I don’t think pathway is the right term – it has the wrong medical connotations, but it does at least highlight the need for solutions that serve members till death do them part.
NEST warns that a major mis-selling scandal is likely to hit millions of retirees unless default decumulation options are set up.
NEST says providing advice and guidance alone would not meet the needs of millions of savers approaching and entering retirement.
It wants pre-set retirement options which meet high minimum governance levels to be set up by pension schemes – helping members get the most out of their savings for life.
NEST points out members face multiple risks including overpayment of tax, being scammed, facing higher overall costs and spending too much (or too little) in retirement.
Here’s what Gavin actually has to say
“We don’t need to look too far for the answer. Auto-enrolment has worked extremely well and can be a model for where to go from here. No one is tied in, savers are free to make their own choices, but most of the hard work is done for them. We think that’s what’s needed in retirement too”.
Qualifying workplace pension schemes, which have a fiduciary duty to their members, should be expected to offer a straight-through solution from saving through to taking an income, so anyone who doesn’t want to shop around doesn’t end up worse off.
“We want strong default options in place to complement a thriving and competitive advice market. We believe that’s the way to avoid the next pensions mis-selling scandal and give millions of savers peace of mind in old age.”
NEST says that qualifying workplace schemes should be compelled to offer a guided pathway for those who remain disengaged or just want a trusted source to do it for them.
Right Solution – wrong problem
I agree with all of this, but NEST’s solution is designed to meet its savers needs in a decade’s time. In the meantime, hundreds of thousands of savers will be looking for a home for the transfers they are taking from occupational DB schemes. As this blog points out, they have no guided pathway, only an array of products about which they know very little .
The British Steel Pension Scheme has been succeeded for its current employees by a new DC arrangement which could- in theory – provide the guided pathways Gavin is talking about. I have met a number of current TATA employers – none of whom had considered transferring into their TATA workplace pension. I think this might be a good option.
But it would only good for the relatively small number of current TATA employees eligible for membership. The majority of BSPS deferred members are not eligible for the TATA DC scheme but are eligible for the kind of workplace pension scheme that Gavin is talking about.
But in all the conversations I have had about transfers, both online and face to face, I have not heard mention of these new workplace pensions – once!
Why workplace pensions aren’t being used for transfers.
There are two reasons
- Workplace pensions have their eyes set on receiving auto-enrolled contributions. They are managing small pots for the future, they have not prepared themselves for helping people spend their pension pots today. They are ill-equipped to deal with let alone compete for transfer business.
- The people advising BSPS members (and many others) about how to spend their pots are looking everywhere but workplace pensions. They may have interest in managing the money themselves, they may wish to retain advisory rights over the money or they may simply be unaware of the workplace pension retirement option.
But the average cost of managing a pot in a workplace pension is around 0.5% of funds, typically half the cost of managing money in the self-invested personal pensions. This matters when you have a pot which is on average worth £350,000.
Workplace pensions are set up to help people who may not have advisers and offer those who want self-sufficiency, options to manage their investments independently. Non-advised options may be scary, but they are the alternative to paying ongoing advisory fees.
Both from a cost and value perspective, workplace pensions should be the natural home for much of the money that is flowing out of DB schemes. NEST is now able to receive transfers in as are all the other qualifying workplace pensions. There is still time to construct the guided pathways Gavin is talking about in advance of most transferors starting to spend their pots.
There should be a clear alternative to the advised SIPP and it should be on the menu of choices available to anyone considering transferring out of a DB plan.
Food for thought for the FCA
Just how many of the people advised to take a transfer from BSPS, have discussed their current workplace pension (including the new TATA DC arrangement) – with their adviser?
More widely, what are the IGCs of insurance companies offering workplace pension products doing to promote workplace solutions against individual self-invested plans (often offered by their own insurer)?
What are the trustees of occupational pension plans (including master trusts like NEST), doing to promote themselves as homes for these substantial sums of money arriving from CETVs?
At an advisory level, can advisers – as they had to in the days of RU64 , demonstrating that independently sourced personal pension solutions, beat transfers in to lower-cost occupational and group personal pension arrangements (available to their clients)?