Pensions World

Offering Nest as another pension option means we could all be in it together suggests Stephen Budge, KPMG

With less than a year away to the onset of the auto-enrolment duties, employers are taking the opportunity to review their pension provision. While the majority of larger employers will want to offer their own arrangement to their employees, maybe all employers should consider offering the National Employment Savings Trust (Nest) as part or as an alternative pension option?

Existing Nest savings

If an employee moves to another employment having had their pension provision through Nest, that employee will have legacy savings which they will not be able to consolidate with the new employer sponsored pension provision because of the transfer restrictions. For most employees this is not likely to be an issue, but for some it may support engagement if the employer can provide continued investment into the member’s Nest account.

Controlling costs

As schemes could see a significant increase in membership, this could have a detrimental impact on existing provision because of the potential dilution in member contribution quality (the lowering of the average contributions from members). As such, the administrator or pension provider may want to alter the pricing of the scheme.

An alternative to this is to consider the provision of pension savings through an alternative arrangement such as Nest to some or all of the non-member population or alternatively as a feeder scheme for new or lower paid employees. This approach could help control the employer and existing member costs.

Default solution

There is ever increasing focus on appropriate default design and the ongoing governance of strategies in defined contribution pension provision with recent guidance and interest from the Department for Work and Pensions, the Pensions Regulator and bodies such as the Investment Governance Group. As such, trustee groups and governance bodies need to make sure that their default design remains appropriate for the workforce, taking into consideration the profile and broad risk tolerance.

Rather than them having to change or add alternative strategy designs, the availability of Nest as an alternative pension savings vehicle provides the choice of savings strategy in the form of target date funds – a clear investment alternative for members.

Fees

The fees members pay for using Nest are fixed at an annual charge of 0.3% on savings, plus a contribution based charge of 1.8%, which broadly equates to 0.5% over the first five years. For those employers offering pension provision which is more expensive, they may want to provide members with the option to use Nest in case they do not want to pay the higher fee for the employer sponsored arrangement.

Ethical and religious investments

Similarly, Nest provides access to ethical and religious investments, the provision of which can be comparably costly to members of employer sponsored pension arrangements.

Nest provides a strong governance model for both options and at the same fee as their other investment choices. As such, trustees and employers may find that members wanting these types of investments will be better suited (from a cost and governance model approach) if they were to use Nest to facilitate this choice.

Alternative approach

The provision of two pension arrangements may seem like an administrative headache. However, these considerations provide a challenge to those employers focusing on a single provider solution and a two scheme design could easily be supported through the use of technology.
In practice, employers may be happy to provide a single solution – and there is indeed value in doing so – but it is important to consider alternative approaches to pension design as a way of fulfilling the forthcoming auto-enrolment duties.