A government consultation on the future of NEST has left experts concerned about the implications for market competition finds Sara Benwell
A consultation on the future of NEST will explore whether the mastertrust’s remit should be expanded.
Two key proposals include allowing the government-backed body to provide post-retirement products and exploring whether the scheme should be allowed to offer its services to non-members.
Access to freedom and choice
Some have argued that the move is logical, pointing out that the wide-ranging changes of ‘freedom and choice’ have fundamentally altered the marketplace and that NEST’s 3.2 million members should have access to new post-retirement products.
Currently NEST only offers its members the choice of a cash lump sum, or annuity purchase from a limited panel of insurance companies.
NEST has an opportunity to pioneer new ideas”
Tom McPhail, head of retirement policy at Hargreaves Lansdown said: “This call for evidence makes sense. The current restrictions on NEST risk leaving its members without the help and support some of them need to make the most of their retirement savings. With pension freedom the rules of the game changed, so the services offered by pension providers needed to change too. Commercial pension providers have all already adapted to reflect this; NEST now needs to do this too.”
“NEST has an opportunity to pioneer new ideas around the provision of drawdown for lower value and financially disengaged investors, as well as innovative solutions to the challenges of longevity insurance, through the use of deferred annuity type products.”
However, competitors have warned that opening up NEST’s proposition to non-members would undermine fair competition in the private market.
AJ Bell senior analyst Tom Selby said: “There is a serious sense of mission creep about the government’s proposals to expand NEST into a new state-backed open market individual pension provider in an already competitive market.
“NEST was set up to deal with a clear market failure in the pensions accumulation phase - namely that the insurance industry was unwilling or unable to serve the automatic enrolment market, and particularly those with small pots.
It is clear that this consultation is trying to turn NEST into a wider product provider where there is currently no market failure”
“While it would be good for existing NEST members to have access to a drawdown solution in the wake of the pension freedoms, it is questionable whether there is a market need for a wholesale state-backed individual pension and drawdown provider.”
Darren Philp, head of policy and market engagement at the People’s Pension added: “The Government needs to decide what the long-term role of NEST is. NEST was set up to provide a simple automatic enrolment solution to its target market. It is clear that this consultation is trying to turn NEST into a wider product provider where there is currently no market failure.
“Given how the market has responded to the challenge of auto-enrolment, it is far from clear why we should be using a heavily subsidised government-backed scheme to provide services and products that the market is well-equipped to provide in its own right.”
A key concern is who would pay for the new offering. As NEST receives a government loan many believe it would be unfair for it to use this to take market share from private providers.
NEST was established with a public service obligation to address concerns that small and micro-employers would not be able to access an auto-enrolment provider. That’s one of the reasons that its remit included a focus on providing a low-cost auto-enrolment solution to the smallest employers, and why it received state funds.
Its role was to be a provider of last resort with the intention that it should complement rather than replace or compete with private sector providers.
If NEST wants to be on the same playing field as everyone else, then it needs to play by the same rules”
Morten Nilsson, chief executive of NOW:Pensions said: “The government has created and funded the largest auto-enrolment provider that is now considering using its unique funding advantages to potentially engage in more profitable activities that will extend well beyond the target group of its public service obligation.
“The government needs to think carefully about the consequences of allowing NEST’s role to significantly expand and the impact it would have on the future shape and competiveness of the market.”
Philp added: “The DWP can’t have its cake and eat it - if NEST wants to be on the same playing field as everyone else, then it needs to play by the same rules. The consultation makes no comment about how these extra services will be funded - this should not be paid for by the taxpayer.”
Last year, the National Audit Office said NEST’s funding model was “inherently uncertain” and concerns have been raised over whether the mastertrust will be able to repay its state loan, which has rocketed to £460m in the last 12 months.
But allowing the organisation to distribute its products more widely could help increase profitability.
McPhail said: “NEST still owes the taxpayer around £500m in start-up capital which was used to get the scheme off the ground. According to the National Audit Office it is still a very long way from being able to pay off this debt. Bringing in extra revenue by offering a drawdown income solution might be a way to help NEST pay off its debt.”
NEST still owes the taxpayer around £500m in start-up capital”
Nilsson argued that this left the government with an obvious conflict of interest. He said: “This highlights an inherent conflict for government in both monitoring the competition angle and ensuring that NEST is able to repay its loan.”
Responding to concerns of mission creep, Debbie Gupta, executive director, corporate services, NEST, said; ”We have a duty to our members and that is our priority.
“Last year we released our retirement income blueprint. Based on extensive research, it set out what a good retirement journey would be for our members. As the Trustee of NEST we believe we have a duty to ensure our members can access their money in ways that work for them.
”We want to provide a retirement journey for our members within a trust-based framework so that it not only has high governance standards and provides value for money but has active oversight by the Trustee.”