More than a million workers building retirement savings with Nest, the state-backed pension scheme, are unlikely to be offered bank account-style access to their savings.
Nest, whose membership has swelled to 1.7m since 2012 as automatic enrolment of employees into workplace pensions rolls out, has indicated that it will not embrace the chancellor’s ambitions for pension savers to be given access to their funds like a bank account.
Reforms due to come into force next year will allow those aged 55 and over to be given new flexibility to take savings as a cash lump sum and avoid buying a secure income in the form of an annuity.
George Osborne had indicated that the changes will lead to people being able to access their defined contribution pension pots as and when they wish, like a bank account.
But Nest, which cost the government £170m to set up, says it is working to give members more flexible access to their funds, but bank account-style access was unlikely.
“Of course there’s an expectation that we can use the ‘hole in the wall’ to get our pension out and that it will be free,” said Tim Jones, chief executive of Nest.
“But transactional bank accounts with cash machines, they’re expensive, and there’s no super profits to pay for it. For me, given that most people have a current account ATM card, or a bank account with an ATM card, why would I replicate that cost base?”
Mr Jones envisages that Nest savers, whose numbers are projected to double to 3.4m over the next few years, will instead be able to shift their money from a drawdown-style Nest account into their own bank or building society account, “rather than going the whole hog and giving them a Nest cash card”.
Cost is also a major reason why Mr Jones is reluctant to change Nest’s charging structure. The provider levies both an annual charge of 0.3 per cent and a contribution fee of 1.8 per cent.
“I would resist on administrative cost burden grounds and simplicity grounds from having to run money in Nest at different price points,” said Mr Jones.
“At the moment, when the money comes into Nest it all runs at 30 basis points and we have a contribution charge. What I wouldn’t welcome is running some money at this price point and some money at the other. It would also just make the message about Nest less simple.”
Mr Jones said removing the contribution charge could also impact on the repayment of the government loan, which is now £299m.
“The contribution charge element front-loads cash flow when assets under managements are as low as they are at the beginning,” he said.
“So if you wanted to shift to just, say, 0.5 per cent annual management charge, so there wasn’t a 0.3 per cent AMC and 1.8 per cent contribution charge, that’s got a pretty significant short term impact on cash flow into Nest.”
He added discussions would need to be had with government and market participants “who have made it clear that they have got an interest” in Nest’s marketing structure.
“I don’t see any of this being discussed or decided in this parliament, because there’s kind of no need to. There’s plenty of time before 2017 to decide in the next parliament and I think that’s what will happen.”
However, Nest has shown keener interest in exploring another idea championed by the government: risk-sharing pensions.
The Nest pension is “defined contribution”, or money purchase, where members take on all the investment and longevity risk of building their pots and turning them into retirement income. But Mr Jones said it “would be wrong to ignore collective defined contribution” schemes, where members pool their pots to reduce risk.
“There are some interesting concepts in CDC,” said Mr Jones. “Yes, we will look at it.”
His views are at odds with those of some other pension providers, who regard CDC as a distraction at a time of great change in the system. However, Mr Jones said he would consider CDC for the “retirement solution side” only – unlike CDC schemes in other countries, where members share risk during both the accumulation and decumulation phases.
“At the moment I would describe the accumulation phase of Nest as working fine, so I have really no immediate member interest yet to do anything there,” he said.
“In the retirement income space, an annuity is a kind of CDC so would I automatically reject CDC in retirement solution products? No.”
However, he was less keen on offering members “defined ambition” pensions, an alternative arrangement put forward by the government where members are offered a “soft” promise of their retirement income.
“My problem with defined ambition and the pension promise is the giving up of liquidity, which is needed to underpin the promise,” said Mr Jones. “I would need persuading that this could be overcome.”
Nest is due to launch a formal consultation on how it might help its members access their retirement pots more flexibly in future.