Can NEST deliver on cost?

The National Employment Savings Trust (NEST) is expected to enrol anything between two and five million individuals nationwide from next year, so if scale is the key to transparency and potentially reducing charges, is NEST in the perfect position to take advantage of this?

NEST Corporation believes it will offer members both low charges and the highest possible level of transparency.

The scheme has a combined charge comprising a 1.8% contribution fee and a 0.3% annual management charge.

The 1.8% contribution charge will fall away once NEST’s start-up costs are met.

Lower charges

Chief investment officer Mark Fawcett says it is unlikely the charging structure could drop any lower, despite the scheme’s large scale.

He says in terms of transparency, the charging structure is explained very clearly to members when they join through a welcome pack.

“The key thing is the combination of the two over a reasonable savings period leads to considerable lower charges than our members would have had access to prior to joining NEST,” he adds.

NEST believes over a reasonable investment period the combined charge is equivalent to about 0.5% AMC, which according to its own analysis is more beneficial to a member’s pot than under the stakeholder charge cap, which charges no more than 1.5% of a member’s funds for the first ten years, falling to 1% thereafter.

NEST’s projection found a 13% reduction in pension pot under the stakeholder cap, while under the NEST charging structure this drops to 5.8%.

However, it all depends on how long this “reasonable investment period” is and NEST has faced criticism for being detrimental to those who are members of the scheme long term.

Fifteen years

Centre for Retirement Reform director general John Jory believes it will take about 15 years for NEST’s estimated 0.5% AMC to kick in.

“It is alright if people know they are to be saving for another 20 years but they don’t know,” he says.

“If someone was saving for five years it would not be equivalent to 0.5% AMC. I suspect anyone from the age 50 does not know when they will retire. It is far more flexible; people are working longer or in a part-time capacity.”

NEST’s Fawcett counters, saying NEST is “certainly not in a position to discriminate against people who are not going to be in the scheme for a long time” as the vast majority of savers will get 50 basis points or lower over a reasonable savings period. “The key thing for them will be getting the tax relief and the employer contribution, things they won’t have had before.”

Henderson believes 2.1% [1.8% + 0.3%] would be a bad deal, but 50 basis points for a basic administered scheme built around passive funds is quite competitive compared to someone doing it themselves.

Elsewhere, Jory queries whether people will be able to make a sound judgment between NEST and another scheme.

“Will the lower to moderate earner understand how 30 basis points plus 1.8% initial charge stacks up against another scheme with a 60 basis points AMC? I would say they won’t.”

Value

However, Henderson concludes it is dangerous to focus too much on fees as it could actually limit better member outcomes.

“Sometimes it is worth paying more to get a better outcome. It is about value not the lowest fee,” he says.

Indeed, sometimes you do have to pay for quality and TPR’s goal of improving DC member outcomes across the board will mean DC no longer remains defined benefit’s poorer cousin and the appropriate fees will be justified.