Beware the cuckoos in the NEST

cuckoo in the nest

The NEST insight conference was held yesterday in the old assembly hall of the City of London School. Nowadays, the hall is an auditorium for JP Morgan who hosted and delivered a keynote on the changing needs of today’s pensioners (Apparantly they don’t need pensions but access to capital to shape their retirement income to their needs). JP Morgan told us the power of owning data. NEST’s data is extremely valuable, it is being shared with one of NEST’s greatest potential competitors – Vanguard.

Nest Insight is sponsored by Vanguard, who like JP Morgan are an American asset manager with designs on our money. Vanguard has produced a report on NEST’s membership and its participating employers. It’s called – rather misleadingly “How the UK Saves 2018” – it had better be called – “despite auto-enrolment, we’re not saving much”.

In yesterday’s audience, I spotted a number of NEST stalwarts including member of the member’s panel, employer’s panel as well as NEST’s sponsor the DWP. I wondered how they felt about these commercial partnerships and whether – for the money that NEST has eaten so far- it shouldn’t be publishing its own data and commentary.

Turning to the back cover of this report I read that it is “not to be distributed to the public” as its for professional investors only (as defined under the MIFID II directive). So it’s rather odd that it sits on NEST  Insight’s public website, the link is here.

I reprint most of the Executive Summary as it makes for salutary, if depressing, reading. The report shows all the data that is being shared with Vanguard. I wish it wasn’t in the hands of Vanguard.

Contributions

As at 31 January 2018, 93% of employers had enrolled workers at the then-statutory minimum 2% total contribution rate. Small and micro employers dominate the 7% of companies enrolling workers at a higher rate.

Members who have remained with NEST for the full 12-month period to 31 January 2018 have a median total contribution, net of fees, of £300 and an average of £394. As annual mandatory minimum contribution rates increase, these numbers are likely to rise.


 

Account balances

Median and average balances are £200 and £450 respectively. Balances are expectedly higher amongst active members, at £278 and £563 respectively.

Predictably, balances rise with income and scheme tenure, while workers aged 55 to 64 have balances nearly three times greater than their counterparts below the age of 25.


Gender and income differences

The median balance for females (£174) is 76% of the median balance for males (£228), driven by female average earnings being lower than males in aggregate. However, after adjusting for earnings, women have higher median contributions and higher median account balances in all but the highest earnings band, where the difference was negligible.

For workers earning between £10,000 and £14,999 annually, female median contributions and account balances were 26% and 20% greater than males respectively.

Thus, after controlling for earnings, women are found to be better retirement savers than men within the NEST arrangement.


Adequacy

Since auto enrolment is in its infancy, current contributions and account balances are insufficient guides to future retirement income adequacy. Our projections suggest that, through participating in NEST, a typical low-income 22-year-old might generate annual retirement income of £3,000 in today’s money, amounting to a replacement rate of 15%.

Combined with the State Pension, this represents a projected total income replacement rate of approximately 55%.

This projected NEST retirement income compares to the average payment to pensioner beneficiaries of the Pension Protection Fund (PPF) of £4,309.3 This suggests considerable progress on the challenge of retirement adequacy, while also highlighting that further progress is needed on minimum contribution rates in years to come.


Assets under management and investment returns

Assets invested through NEST total £2.6 billion.

These assets are allocated 49% to equities, 24% to investment-grade bonds, 13% to property, 8% to growth credit and 6% to short-term reserves.

Three-year annualised returns for both the default NEST Retirement Date Funds and other investment options are generally well above their benchmarks, reflecting strong performance from some asset classes.


Member asset allocations and investment choices

Ninety-nine per cent of members are invested in NEST’s default investment strategy, a range of retirement-date funds that are designed to change members’ asset allocations as they progress through working life to retirement.

As expected, switching activity is low, with fewer than 1% of members changing their investment options in 2017.


Transfers

The overwhelming majority of NEST members are in the accumulation phase of retirement savings. Of the 1% that have retired, two-thirds have withdrawn money from their accounts.

Finally, since 2017 NEST has allowed members to transfer pension savings from other UK-based registered schemes. In the first ten months of this option being available, nearly 1,000 members transferred assets into NEST, representing over £7 million in assets.


 

1 Department for Work and Pensions (2016) Workplace pensions: update of analysis on automatic enrolment 2016.

2 All NEST data in this section are as at 31 January 2018.

To anyone used to running a DC operation, these numbers are commercially upsetting. The average account balance is less than the typical contribution were a member to stay a year. This suggests such short tenure of employment that NEST’s system of allocating a new account for each employment , may lead to members having a plethora of pots with little money to show for it. Not only is this ruinously expensive to NEST, it’s very confusing to members.

Despite the brouhaha of it not being able to attract transfers in until recently, now that the doors are open, only £7m arrived – from the entire UK population. I know people with DC pots of more than £7m on their own. Excellent as NEST’s performance has been, it is simply not attracting money to it.

Though an average earning  22 year old with a lifetime in NEST might expect NEST to contribute 15% to their lifetime income, this is not much, certainly nowhere near the replacement rates promised by SERPS (later S2P). Comparisons are made to pensions paid from the PPF and these may be the closest proxy , in terms of actuarial accuracy, but the reality is that we are still in the foothills, mountain peaks are on the distant horizon and aspirations for those peaks of typical pensions from the PPF hardly seem ambitious.

If this is how the UK saves in 2018, then we look more like a third than a first world country.


 

This isn’t how we save and NEST is not representative of UK pensions

I am not so depressed about Britain as a whole.  I am concerned about NEST being taken as indicative of the national savings rates.

NEST has habitually been used as a dumping ground for the least attractive part of an employee benefit package. Even MacDonalds, not known as a competitive provider of workplace pensions, worked out that it would split its workforce between the “haves” – who got a properly funded MacPension and everyone else – who got NEST. NEST’s public service obligation has been mightily abused by organisations as reputable as the BBC (who similarly dump on NEST).

NEST has neither been able to inspire transfers in or voluntary contributions, it remains quite unloved by its 6.4m account holders and little understood by its 600,000 employers.

57% of NEST employers employ four people or less yet the 1% of NEST employers with more than 250 members represented 40% of those 600,000 members.

NEST is losing out twice, having to service the smaller employers with little financial benefit and having to take the unloved and unwanted employees of larger schemes.

This really is a toxic mix – NEST is bailing out auto-enrolment.


Why no pride?

We are told that the average members earns £18,500 and is 38 years old, with over half earning less than £20k. Despite the contribution cap being lifted, only a quarter of NEST members earn more than £25k.

NEST  probably offers as good a value for money as any DC pension in Britain, it is well governed, well invested and well operated- why is it being shunned by clever people who could enjoy its benefits with their wealth?

Where is the pride in this organisation within Britain. Why is Guy Opperman, our pensions minister and Esther McVey, the Minister of State for the DWP, not promoting NEST more?


Transfers out?

There is a small and very unhelpful section of the report on p33 dealing with claims on NEST. It shows that transfers to other qualifying pension plans are pitifully small.

As Romi Samova and Pension Bee’s Robin Hood Index shows, it is virtually impossible for people to transfer money away from NEST easily. We are told this is changing , but have yet to see any evidence that it has.

A proud pension organisation is one that can offer its members the freedom to take money to it and the freedom to take money away from it. The amounts coming to NEST by way of transfers and leaving it, suggest that its money is considered lost by members.


The threat of predators

NEST keep dangerous friends, JP Morgan and Vanguard are known predators in the DC space, there are plenty of organisations eying NEST’s assets. At present there are insufficient account balances with NEST worth transferring for such friends to be showing their fangs.

I worry that NEST is being sponsored by such dangerous friends and that data – a currency in itself (as JP Morgan told us in that keynote) is being shared in such an open way.

The best thing that can happen to NEST is that it builds up profitable account balances and pays off its burgeoning debt to the DWP and taxpayer

The worst thing that can happen to NEST is that it gives away its secrets to the very organisations most likely to steal its assets like the Cuckoo in the Magpie’s NEST.

 

 

About henry tapper

Founder of the Pension PlayPen, Director of First Actuarial, partner of Stella, father of Olly . I am the Pension Plowman
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