NEST charging structure is an admission of Stakeholder failure
This was our conclusion this morning, after hearing about the proposed level of charges for the new National Employment Savings Trust (NEST).
The government has announced that NEST will meet the Pension Commission’s goal for a low cost retirement savings scheme, as it will have an anticipated 0.3% annual management charge over the longer term.
However, they have also announced that there will be an initial charge on contributions of about 2%, to meet the costs of establishing the scheme.
Looking at the pension plans already available on the market, the lowest cost personal pension on a nil commission has a reduction in yield of 0.47% per annum, with no initial charges.
We ran some simple calculations, based on a monthly pension contribution of £100. Over a 35 year term, the NEST charges would result in a final fund value of £157,085. The lowest cost personal pension would result in a final fund value of £153,994.
Over a shorter term of 20 years, NEST charges would mean a final fund value of £48,231 with the 0.47% annual management charge from a personal pension creating a fund valued at £48,212.
The shorter the term, the more expensive NEST becomes when compared to existing personal pensions and Stakeholder pensions.
On the basis of these numbers alone, the National Employment Savings Trust appears to be a massive waste of time and money, when the Government could instead deploy existing personal pension and Stakeholder pension schemes for this purpose.
The Government has committed to making a loan to NEST to cover the gap between the “inevitable gap between costs and revenues” until the scheme is fully established, a phrase used by the Department for Work and Pensions. This means no immediate cost to taxpayers.
The gauntlet has now been thrown down for pension providers to deliver something cheap and simple to market that can compete with NEST.
Does this proposed charging structure for NEST count as admission from Government that their Stakeholder pension initiative, which had no initial charges and resulted in the widespread introduction of single pricing throughout the pensions market, was an abject failure?
It is also important to remember not to confuse cost and value. When it is your income in retirement at stake, this could be an expensive mistake to make.