Tim Jones, CEO of UK government-backed master trust NEST (National Employment Savings Trust), defines himself a ‘renegade retail banker’. He refers to his experience as head of retail banking for NatWest, a role he held until the bank was acquired by Royal Bank of Scotland in 2000.
In that role he would have learned skills essential for the top job at NEST – in particular, learning to understand your target market and your customer base inside out, being able to communicate with them and engaging with their emotional responses.
“It’s very important to engage with our members’ emotions because they are very powerful drivers”, he says. Research done by NEST published this July shows that the emotional responses to issues around pension saving are often worry and doubt, frequently led by a lack of education and trust towards the finance industry.
“We don’t need to talk to our members in detail about our investment strategy. Designing the NEST investment strategy is our job. But we need to understand their emotions. They are in a conservative mindset. It is a shock to them to find out that the money is invested and that it is not guaranteed.”
The way to get the best outcome for them, Jones says, is by making the DC pension product as simple as possible and using simple language to explain it. But even that might not be enough – and how can a DC provider like NEST ensure that members will make the best decision at retirement?
“Thanks to automatic enrolment we have few opt-outs. The opt-out rate at NEST is 8%. So once our members get to a certain age, we need them to engage with our product. Because every individual situation is different, they need to engage with us in order to understand what is best for them.”
So far, 8,300 employers have auto-enrolled 1.3m employees with NEST – more than any other master trust in the country. Jones ensures that NEST has an up-to-date understanding of its members and employers, so that it has an easier job relating and communicating with them. However, he adds: “The latest research shows we have a long journey to take our target market from where they are to a mindset that will make them most successful in working with our product to get the best outcome for their later lives. They are perfectly capable of understanding and becoming educated on pension saving. They just need to feel that there is a place that they can come to, a product that they can interact with that is designed for them. Our goal is to make it a normal, everyday part of life to reflect and engage with our product.”
He suggests that if NEST’s communication strategy were successful, its members will think about pension saving the same way they would think about mortgages or any other consumer product that requires an important decision process – which, as NEST’s research suggests, is not the case at the moment.
As a master trust, NEST is affected to a lesser degree by the announcements within the 2014 Budget, particularly those regarding guidance, because, as Jones points out, most of its members are a long way from retiring and have small pension pots. However, he says: “In light of the budget changes and the new freedoms, we are going to spend the next year researching and consulting with the public on what is the best thing to do in the interest of NEST members. We’ll consider whether and how to adopt our investment strategy and prepare for the different retirement income options they may wish to pursue. We’ll discuss the results of this investigation with the government as an when appropriate.”
For the accumulation phase, NEST targets a return of 3% above the consumer price index (CPI) after all charges. Jones explains that NEST focuses on keeping charges low and transparent, and he believes his organisation is achieving this by keeping transaction costs low. NEST members are charged 1.8% each time a new contribution is made and 0.3% on their fund each year (annual management charge). Jones explains that trans- action costs are kept low by moving assets within the trust’s different funds rather than trading them on the market.
“We’re crystal clear about our charges for members. One dimension of fund performance is the charges you levy, but another is the drag on performance, that is transaction costs. We have designed NEST in a way that minimises transaction costs, and the best way to minimise these is minimising the number of transactions.
“If, for instance, we need to sell higher volatility assets belonging to older people, because we’re going to be a net taker of cash for the next two to three decades, all we do is to effectively sell those assets internally at today’s price to the younger people in our membership. There is no transaction; it is all just a reallocation of the assets we have already bought. We will always keep that internal market running, particularly when we are at equilibrium in terms of the age distribution of our membership. What we are trying to do across this multi-decade horizon is to create a narrow range of outcomes. We don’t want some people to do well and some to do really badly.”