Nest faces industry revolt over default drawdown plans

Nest faces industry revolt over default drawdown plans

A government proposal to extend the National Employment Savings Trust’s remit to include the provision of an unadvised default drawdown service is likely to be met with fierce industry opposition, with some going so far as to say it would be illegal under European law.

In early July, the Department for Work and Pensions launched a 12-week consultation period, in which it proposed extending Nest’s remit to allow it to offer “a range of decumulation services for its members”.

Nest had already begun to draw up plans for a comprehensive range of retirement products, which it called its “retirement blueprint”. A response to pension freedoms, the blueprint includes plans for default lump sum, drawdown and guaranteed income funds.

FTAdviser spoke to a cross-section of product providers and financial advisers, and all said they opposed the proposal, on the grounds it would be anti-competitive for a government-backed provider to enter a functioning market.

They also argued it would undermine the financial advice market.

Chris Hannant, director general of the Association of Professional Financial Advisers, said the only justification for the government entering a market was to address a failure.

Before its inception, he said the auto-enrolment market looked like it might fail, particularly for those with low incomes and small pension pots, meaning the creation of Nest was justified.

“At present, I see no equivalent market failure so there is no reason for Nest to compete in an existing functioning market,” he said.

He added that there was “a strong chance” it would be against the EU’s state aid rules - as set out in Articles 107-9 of the Treaty on the Functioning of the EU (TFEU) - and, therefore “illegal” for as long as the UK remains in the EU.

Kate Smith, head of pensions at Aegon, agreed that the proposal was anti-competitive.

“For there to be a resonable amount of competition, there needs to be a level playing field,” she said.

Ms Smith said it was “a little bit too early” for Nest to be thinking about the drawdown phase, and that no decision should be made at least until all employers had passed their staging date.

She added the move would undermine the financial advice market, and that rather than providing default products for disengaged members, she said, “we need to focus on getting people more engaged”.

Andrew Pennie, marketing director at Intelligent Pensions, said his firm was “largely against the Nest proposal”, saying resources could “be better spent elsewhere”. He recommended resources instead be spent on “helping people to access advice” and “helping people engage earlier”.

He said non-advised drawdown was likely to result in “poor and inappropriate outcomes”.

“Perhaps the government should look to tackle these issues and the issues raised by the FCA on non-advised drawdown and lack of ‘shopping around’, before it thinks about whether Nest should be offering drawdown and other decumulation solutions,” he said.

However, he added that Nest could offer a withdrawal service for small pots, because it was not “an overly attractive market for commercial operators or advice”.