The government has been told to amend legislation to allow Nest members to drawdown their pension pot, as well as extending investment pathways to trust-based schemes.
The Investment and Saving Alliance made this suggestion in its response to a call for evidence on savers’ understanding of their pensions, which closed on July 25.
The Department for Work and Pensions said that it wanted to understand what support and decumulation products are offered to members, along with what might be offered to them in the future.
Officials were also interested in gathering views on the current offer available to Nest members and the scope for its development.
“We believe legislation should be changed to enable Nest to offer drawdown to all of its members,” Tisa head of retirement Renny Biggins said.
The Society of Pension Professionals stated in its own response that it had no objections to Nest offering a full suite of income options for members.
“Nest should also be exposed to the same market pressures and restrictions as other providers to level the playing field and ensure a fair and functioning market,” Biggins continued.
Nest encouraged to set fees in line with the market average
The government has asked the industry whether Nest should “be able to deliver the full range of income solutions for members unwilling or unable to access decumulation options without support”.
After pension freedoms were introduced, Nest offered uncrystallised funds pension lump sums so that members could access their full pot as cash or take regular withdrawals. It also gave them the option to transfer to another pension scheme or purchase an annuity.
Tisa queried why a full range of income options — which it interpreted as “flexi-access drawdown” — should only be available to Nest members, proposing that these be offered to all.
It argued that drawdown may be the preferred option for many members reaching their normal minimum pension age.
Noting that members wanting to access drawdown need to find a provider and then arrange a transfer — which often incurs charges — it said that “this cannot be considered a good customer outcome”, and called for drawdown to be made available to Nest members via changes to legislation.
Tisa suggested that Nest needed to begin acting more like its commercial counterparts and be more easily comparable to the rest of the industry, which would include “operating a fee structure which is broadly comparable to market average”.
Offering drawdown could allow Nest to “significantly reduce the number of smaller transfers for the purpose of flexible access”, it said.
Meanwhile, the SPP said: “Ultimately, we see no issue with Nest offering the full range of income options for members.”
It endorsed flexible investment strategies, such as having target retirement points wider than a single year, and derisking into retirement.
The industry body acknowledged the daunting nature of switching to a new arrangement for some members, and observed that this can come with cost.
“We note that at present the number of pots within Nest, where income withdrawal over time is a realistic option (as opposed to lump sums), may be small but clearly it will increase over time,” the SPP said.
Nest director of customer engagement Mark Rowlands told Pensions Expert: “A growing number of Nest members will be retiring over the coming years and it’s crucial they can benefit from the same kind of support and options available to other pension savers.
“We welcome the opportunity to discuss how Nest can continue to support automatically enrolled savers into their retirements, alongside the rest of the market.”
Default pathways are ‘critical’
Following the introduction of pension freedoms in 2015, the Financial Conduct Authority became concerned about investors “sleepwalking” into having their money invested in very low-return cash funds, where they had no financial adviser.
In 2019, the regulator proposed new rules on investment pathways, which were aimed at ensuring investment in cash was an active decision. These came into force for contract-based schemes in 2021.
The SPP and Tisa advocated that investment pathways should be used to help members of schemes used for auto-enrolment.
“We have anecdotal evidence from members which show a reasonable take-up for group personal pensions, and there is no reason to see why this would be different for their trust-based equivalents,” Tisa said.
Describing default pathways as “critical”, the SPP observed that investment pathways are already in place for contract-based schemes and suggested that consistency across pension structures would be helpful for members’ understanding.
“This is not to say the existing pathways framework is perfect,” it added.
“It can be seen as a relatively short-term solution (focusing on five years post-retirement even if the strategies run longer than this) relative to the period over which benefits will be drawn, but we would suggest that evolving the existing framework and adopting it across both types of scheme is preferable to adopting a different approach.”
Scottish Widows head of policy Pete Glancy shared a similar view: “Pathways should be offered in any scheme that provides drawdown to non-advised customers, and there is a real opportunity here for the DWP and FCA to align their approaches so that customers, who may have multiple pots in different types of pensions, don’t face unnecessary differences.”
Align communications
The DWP has also asked industry about the support it offers members when making decisions about their retirement.
Tisa proposed aligning the timing and content of mandated communications across DWP and FCA pension schemes.
“We further believe this exercise would also provide the opportunity for a fundamental review of these communications, as they do not engage the typical saver and are often misunderstood or ignored,” it said.
Tisa added that as the principle of value for money becomes embedded into governance, it expects decumulation options “to form part of the holistic assessment over time”.
“This would seem a more appropriate way to measure any consumer detriment caused through restricted retirement options within certain schemes, rather than mandating that all schemes provide all options,” it said.
Alex Janiaud is deputy editor at Pensions Expert, FTAdviser's sister publication
