Amidst the noise about savings for the pensions and the damp squib of a Mansion House speech by the Chancellor, I have been thinking about what the workplace pension is about.
For many people, the money they have in workplace pension pots is something of a miracle, something they have never had before and easy to see on their phones (I got my statement on my Nest account yesterday with a few reminders earlier this week).
I have been, and am, a supporter of the very honest approach Nest have towards our futures. I suspect that they have been highly influential in developing Government thinking on how we spend this miracle of money in the pot and I’ve asked Paul Todd, Nest’s Chief Operating Officer to explain how Nest intends to operate the pensions it offers as a default to its 14m + pensioners over the next few years. He’ll be talking with us at the Pension PlayPen on 29th July on Pension PlayPen – try to keep 10.30 am free in your diary to ask him questions (we have an hour- I could talk with Paul for more than that).
I had a conversation with him after work last night as I was confused by reports in Pension Extra and in conversations with DWP officials about the procurement of annuities by Nest. Let’s clear this up, this is a backstop measure for the pension offered to members as a default and it is not something that members will chose. A bulk purchase annuity will be an investment by the default decumulation fund and will take over for pensioners who are more than 85, the only difference is that the retirement income at this point is for life and there’s no pulling out for cash. Put another way, you will not have a plan B if you want out of the pension.
I was for a moment surprised, as for me the idea of a pension is that the payment is guaranteed for the rest of my life, but I’ve never considered a Plan B of a cash out from the pension. But Paul was clear. Nest’s economic miracle has been to furnish savers with a pot and the backstop it will offer pensioners will be their money while they live if they want to operate Plan B (my phrase). Only at 85 when an insurance kicks in , does Plan B go away.
This makes so much sense for Nest’s savers (I’m one with about £25,000 in my pot). Nest has got so much muscle (and a very strong position with the DWP over its set up loan). It believes that it can offer a pension and a money back Plan B to savers expecting the numbers cashing out to be of the same order as opt out of the DC savings default (about 2%). The point is that the opt-out option (plan B) will make the pension so much easier for savers.
The pension will of course be the core of the payment but the pension fund (in decumulation- ugh!) will be invested and will over time achieve more than an annuity could ever achieve – so long as Nest do their job. And if it achieves more than the return on the fund needed to ensure the core pension, extra income will follow. This is known in the pension industry as “conditional indexation”- it’s a CDC pension that increases the core pension to keep it up with inflation but it is only paid if Nest can afford it, it is not certain.
Paul and I started this conversation in Datchet and ended 40 minutes in Putney and in that time I got the deal. This is as explained by the Pension Minister and it is why you need to be as big and financially strong as Nest to do it and it is absolutely right for Nest’s savers.
It makes me wonder about others. Could we operate money back options for decumulation funds (pensions) at least to 85 to give ordinary folk the opt-out option from their pension? Could Nest eventually be strong enough to run the opt out without insurance and through to death and could Nest’s pension compete with and even offer more – as core – than the annuities? All of these questions have been whirling around ever since. I was at a posh meeting about illiquids immediately after- I couldn’t focus. I had supper with fraud-buster Angie Brooks after that – I still could not concentrate on anything but what Paul had told me.
Nest had offered me the final piece in the jigsaw that I have been struggling with, they have shown me how , with size. confidence and most of all with their members at the front of their mind, they have solved the greatest obstacle with pensions – by remembering the lessons of defaults, nudges and inertia that have made auto-enrolment such a success.
I couldn’t wait to get up and write this blog. Of course I wrote it for myself first – I’m a greedy bugger – but I hope you get some of my enthusiasm through these words. Of course there will be other ways to arrive at the same place and Nest’s membership is different from others, but I think that pensions with a Plan B are going to really take off and I want to help design them!