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NEST reveals principles for post-Budget default retirement solution

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The National Employment Savings Trust (NEST) has revealed how it would like to see the defined contribution (DC) market evolve in the wake of changes that no longer require savers to buy an annuity.

The state-backed master trust began consulting in November on the future of its offering given the removal of compulsory annuitisation – a change that takes effect in three weeks, after it was announced by chancellor George Osborne in last year’s Budget.

Its preliminary findings from consultation responses and external research found most supported the idea, and need, for a default solution turning DC savings into pension income.

NEST, set to become the largest DC provider in the UK, said the general consensus among consultation respondents was that individuals valued the choices provided by the Budget, but many would not want to make specific decisions.

This led to the organisation drafting six principles default retirement solutions should encompass – although it accepted many of the principles cause tension with one another at different stages.

The paper from NEST said the underestimating longevity was a key risk, meaning solutions must adapt to, and account for, changes to longevity.

Solutions should also be designed to ensure DC pots are spent in their entirety, and provide incomes that are stable and sustainable, but still offer flexibility where possible.

The management of investment risk, NEST said, was crucial given the harmful nature of volatility in income-drawdown solutions, with special consideration for inflation risk that should be managed, but not necessarily hedged.

NEST said investment risk will need to be managed to reflect the DC savers desire for investment growth, but minimising the likelihood of running out of money in drawdown solutions.

Despite the expected decline of annuity conversion after 6 April, Mark Fawcett, chief investment officer at NEST, said the evidence indicated that mitigating the risk of outliving ones savings should be a key feature in its default solution.

“What we are seeing is a strong consensus emerging on good quality default retirement income solutions playing a central role in helping these savers achieve better retirement outcomes,” he added.

NEST said without a default solution there was also a risk of conservative savers not utilising their pots, which meant a relatively low-risk investment solution and then annutisation was a positive step.

It also suggested the purchase of an annuity could be done on a deferred basis to avoid handing over of a large sum of savings in one go, a psychological barrier to annuity purchase.

NEST’s consultation will also see it consider providing income-drawdown in-house and whether it could offer collective DC (CDC) solutions to its members.

It said full disclosure of its consultation and decisions on its future structure would be published in the summer of 2015.

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