From Special Report: At Retirement - May 2012
Feathering the Nest
Nest details the process and features from which millions of people will be able to start saving towards a pension
Automatic enrolment will fundamentally change the pensions landscape in the UK. Not only will millions of people start saving for retirement for the first time, but over time these millions will also seek to turn their retirement savings into an income for their later life.
Nest has been established to ensure there will be an easy to use, low-cost pension scheme available to all UK employers to help them meet their new duties. The scheme is specifically designed to cater for those traditionally less likely to save for their retirement – typically people on low-to-moderate incomes.
So how will Nest help its members build up a retirement income and then buy a retirement income product if they need or want to?
Helping members get the most out of their retirement savings is a key consideration of the design of both Nest’s approach to investing members’ money and helping them with their retirement options.
In designing an investment approach that supports members in making the most out of their savings, Nest takes into account a range of risks throughout their time saving with the scheme including capital protection risk, inflation risk and conversion risk. To create an approach that manages these risks appropriately for the new savers created by automatic enrolment, Nest carried out a huge amount of research, including the 2009 international consultation exercise to which more than a hundred organisations and experts contributed.
It has also investigated its potential members’ experience of saving, their attitudes to taking investment risk with their money and how they react if the value of their money goes down.
We know, for example, that people in our target market have some of the strongest reactions to short-term investment ups and downs and in particular, losses. Despite often describing themselves as risk-seeking, younger people have particularly strong reactions to loss which may potentially lead them to opt out or stop contributing at an early stage in their savings career.
This is why Nest looks to manage investment volatility and significantly reduce the chances of short-term losses for its younger members. We then aim to ensure members can take advantage of market growth while reducing the possibility of significant falls in their pot, particularly just before they retire.
Our default investment approach, which we expect the majority of members to stick with, consists of more than 45 Nest Retirement Date funds. Most members will be automatically invested in a Nest Retirement Date fund that matches their expected state pension age. For example, a member would be invested in the Nest 2040 Retirement fund if they are expected to retire in 2040.
We expect up to 90 per cent of our members to invest in Nest Retirement Date funds, either through choice or as the result of not making an active fund choice. However our research also showed that some members will have specific needs or preferences around how their money is invested. This means we also offer a focused selection of fund choices for those who want a different level of risk, or an approach that matches their beliefs or faith.
For that majority of members who remain invested in a Nest Retirement Date fund we divide their time into three phases, reflecting different stages in a member’s life and different attitudes and capacity for risk.
Younger members will usually experience all three of these phases, whereas those joining when they are older than 30 will generally not experience the first, or foundation, phase. Our objective here is to match CPI after charges, therefore protecting the value of members’ pots from losses and support younger members in keeping saving.
Member’s pots are exposed to higher proportions of riskier, return-seeking assets gradually, in the second and longest phase, the growth phase. We target returns of 3 per cent over and above inflation after all charges throughout this phase which lasts around 30 years.
The consolidation phase starts about 10 years before retirement. Here we gradually move members’ pots into assets that broadly reflect the way we expect they will want to take their money out of Nest.
In the early years, this means targeting cash, as we expect most members retiring at this point to have built up small pots they will want to take as cash.
Generally, the consolidation phase will focus on preparing members’ pots in a way that tracks retirement income products – annuities - using a mix of appropriate assets such as gilts and corporate bonds. We expect to grow members’ pot by more than the cost of living during this phase, but our primary focus is on securing the member’s retirement income.
As with other occupational schemes, into the future many Nest members will want and be able to take small pots as cash. However, some members may need, or want, to turn even small retirement pots into a retirement income by buying an annuity.
This purchase is among the most important financial decisions any individual can make, which is why we have taken care to design a solution that will support our members in accessing options that meet their needs.
While members will be able to search for a retirement income by shopping around, many may need an alternative because, as you will know, many providers do not offer annuities to those with pots of less than £5000, and in some cases, £10,000.
Our alternative is to provide straightforward information to help members identify the options that meet their needs and to then enable them to buy products from either our panel of providers or on the open market.
Our Retirement Panel of providers includes both standard and specialist annuity providers: Legal & General, Canada Life, Just Retirement, Partnership and Reliance Mutual.
Each provider is committed to offer Nest members retirement incomes on pots from £1500 and above, and in doing so enabling some savers to consider a retirement income for the first time.
Nest members with health problems or limited life expectancy will be able to get quotes for enhanced or impaired life retirement income products.
While Nest’s Retirement Panel makes it easier for members to access products suitable for their needs and pot size, we will also make it clear to members that they can shop around for their retirement income on the open market and may want to seek advice.
We expect most members to get information on their options and request quotations online, which is straightforward for the member and helps Nest keeps costs low.
However for those members who would prefer to do this through a paper-based process, we make this available. Also, Nest’s UK-based contact centre will be there to provide support and assistance to members throughout their membership including when they come to take their money out of the scheme.
As well as providing members approaching retirement with clear information to help them make an informed choice, Nest will also provide links to other sources of information, such as The Pensions Advisory Service, the FSA’s Money Advice Service and Money Guidance along with information on how to find a financial adviser.
Mark Fawcett is chief investment officer of Nest
•Nest’s investment strategy seeks to reduce the impact of volatility, and encourage persistency, as well as ensure members can take advantage of market growth while reducing the possibility of significant falls in their pot particularly just before they retire
•The default option is a series of target date funds, which sits alongside a focused selection of other fund choices
•Nest members with low-to-moderate earnings are likely to have small pension pots, particularly in the early years of automatic enrolment
•Some members will not want, or be able, to take their pots as cash
•Nest has set up a Retirement Panel of providers who guarantee to provide retirement income products for pots as low as £1,500
•Through online tools, Nest will help members decide what type of retirement income product they need to suit their individual circumstances
•Members can get quotes from the Panel, and they can also shop around on the open market