Work & Pensions Committee - Minutes of EvidenceHC1494

Back to Report

Oral Evidence

Taken before the Work and Pensions Committee

on Wednesday 14 December 2011

Members present:

Dame Anne Begg, in the Chair

Debbie Abrahams

Harriett Baldwin

Andrew Bingham

Karen Bradley

Sheila Gilmore

Oliver Heald

Brandon Lewis

Stephen Lloyd

________________

Examination of Witnesses

Witnesses: Lawrence Churchill, Chair, Tim Jones, Chief Executive, and Mark Fawcett, Chief Investment Officer, NEST Corporation, gave evidence.

Q211 Chair: Thanks very much for coming along this morning. Obviously the evidence that we get from yourselves at NEST will be central to our inquiry into auto-enrolment. Can I ask you very quickly to introduce yourselves for the record?

Lawrence Churchill: I am Lawrence Churchill. I am the chairman of NEST Corporation.

Tim Jones: I am Tim Jones. I am the chief executive of NEST Corporation. I am also the accounting officer.

Mark Fawcett: I am Mark Fawcett. I am chief investment officer of NEST Corporation.

Q212 Chair: I want to start with something that must be of concern to yourselves, which is the Government’s announcement last month that they will delay auto-enrolment for smaller employers and postpone the increases in minimum contributions for all employers. Obviously, the time scale is now elongated, but that must have serious implications for NEST. What are they?

Lawrence Churchill: I think that the impact, clearly, of any delay will be that those people affected by the delay will be likely to end up with smaller pensions, as a result of not having saved for quite as long. As far as NEST is concerned, there will be extra costs to pay in interest payments on our loan with the Government, to the extent that the loan is open for longer and therefore will require more funding for interest.

The issues are quite complex. The Minister has asked us to work with officials to assess the impact more closely. That work is in progress and we would expect that to conclude early in the new year.

Q213 Chair: Do you think that the delay could make life a lot more difficult in delivering what you originally set out to do, simply because it gives other people in the market time to undercut your business or it will just be slower for you to sign people up?

Lawrence Churchill: I think if the delay is just for one year, as announced-the Minister has been quite firm in his statements to Parliament that it will not go any further than that-it is containable. We are not overly concerned that another year’s delay for small businesses will introduce more competition, for example, because these typically are the sort of businesses that do not have any pension provision at all. Being small, the costs of serving them for established providers are likely to be quite high, which is why they do not have any pensions in the first place, because they are slightly out of reach from the target market of the traditional insurers.

Q214 Andrew Bingham: On the subject of the delay and the Government loan that NEST will receive, have you re-estimated the size of the loan as a result of the delay, and the effect on the repayment?

Lawrence Churchill: That is exactly the work that our people are doing at the moment, and we expect it to conclude early in the new year.

Q215 Andrew Bingham: With the economic downturn, there are new players coming into the market, eyeing it with envious eyes for want of a better phrase. Have you made any assumptions about how that will affect the numbers of employers and employees using NEST, and also the number of opt-outs due to the economic downturn and people not wishing to go into an auto-enrolled pension?

Lawrence Churchill: With regard to the economic context and the entry of new competitors, we had started the process of trying to remodel our central assumptions for the future compared with what they were a year or so ago. That is quite complex modelling work because there are a number of interactive effects, some of which you have mentioned. Again, we expect that work to conclude early in the new year. We will be taking a new, central view.

It is arguable that opt-out rates are more likely to go up than down if the economic distress conditions remain for the period, but of course one is always hopeful that by 2015 and so on the economy will have come back again and be more on the upswing. You have to take a point-in-time view of the estimate, but certainly it would be naive to expect that other competitors would not take some business, because they are professional people and have obviously done their research properly as well.

Q216 Chair: When you conclude the discussions you are having with the Department with regard to the size of the loan and things like that, would you be able to share that with us before we finalise our report?

Lawrence Churchill: Provided the timetable fits, absolutely.

Q217 Chair: And also the opt-out rates, because that is important for us as well.

Lawrence Churchill: Yes, indeed. I think that in our evidence to you, which we sent in the summer, we said that as long as opt-out rates were below 50% it wasn’t really anything to worry about significantly. It was only if they went far above that rate. You track the latest public opinion on this, or the commentators’ opinion, and you are beginning to see one or two estimates that it might touch a little more than 50%, but not many at the moment. Experience from the States, for example, about the power of auto-enrolment when there is an employer’s contribution being made, all points in the opposite direction.

Q218 Oliver Heald: There are the restrictions: no transfers into NEST, an upper contribution limit so if an employer has an employee earning more than £50,000 or so there have to be two pension schemes, a fixed price for your product, and so on. What effect do you think these restrictions will have on your attractiveness to employers?

Lawrence Churchill: There is some recent evidence coming from the market, as employers begin to think more seriously about the whole issue, that they might be restricting choices that the employer has, and I will perhaps ask Tim in a minute to come in with some recent research that we have done. But I think that a lot has changed since the restrictions were put in place in 2007-five or so years ago-and the world has moved on. Who would have imagined then that NEST was going to be partnering with traditional product providers? We are now entering into partnership with them mostly because they see that they cannot serve all the customers employed by the corporates they have the management contracts for, for example, and so they want NEST to come in and make sure that the workers get the best scheme that is appropriate for them. Things like that were just not envisaged five years ago.

As chair of the trustees, I could say that it is difficult to see how the restrictions are in members’ interests-and we have a fiduciary duty to have a line of sight to members’ interests-in that they increase cost and add complexity to the offering, and to the extent that they do impede volumes in what is a scale business the loan will clearly take longer to repay. But my feeling about where we are just now is that everyone is agreed that the restrictions should go. The only debate is about the timing-whether it should be at the review stage or straight away. Opinions differ on that, but it is entirely a matter for Government; it is not a matter for us.

Tim, we did some research recently.

Tim Jones: Yes. We carried out a multi-wave research programme with large and medium-sized employers to ask them what goes through their minds as they come towards making their decisions. A significant number of the employers-about two thirds-who said they weren’t planning to use NEST cited the restrictions as the main reason. From our point of view, having been here since 2007 in the Personal Accounts Delivery Authority (PADA) prior to NEST, the restrictions have played out very much as the policy intended. They have focused us on creating a product for our target market of people earning up to £35,000, and you can see that in many dimensions of the way we use language, our investment approach and a number of other features of the tonality that we bring to this product. In that sense they have been a good thing, and they have focused us on our target market.

Given the clearly restricting choice for employers, with them having to have, as Lawrence said, a second scheme for higher-paid workers that is clearly a burden on them, the debate is, given that the restrictions have had a material effect as intended, whether it is now a net benefit or a net disbenefit to retain them. Our job, I think, is to provide evidence of their impact to Government, and then to allow Government to take that determination.

Lawrence Churchill: I find it slightly ironic, in a way, that features that were designed to make us focus on the target market are now playing out in reality as impeding access to the target market. As 40% of low to moderate income workers work for large employers, 40% of our market is, I think, currently having the feelings that Tim has just expressed. One cannot help thinking that if the intention is to keep NEST focused, perhaps this is a sledgehammer to crack a nut. If the trustees were required to report to Parliament annually in our report and accounts about how many high earners came in and why, or how many transfers took place and why, that would allow scrutiny, to make sure that we were kept in the box for which we were designed.

Q219 Oliver Heald: Do you think there is an argument that as there has been this delay in implementation, it is right to have another look at this question of the restrictions because of the economic impacts of the delay, which will put back the point at which you start to see the economics working out for you? Is there an argument there that perhaps the date of 2017 ought to be brought forward to reflect the changed circumstances?

Lawrence Churchill: It could well be. I think that the date of the review is entirely a matter for Government, and the question of whether it stays in 2017 following the delay or is brought forward or pushed back a bit is entirely a matter for Government. I am sure that as a result of this inquiry new evidence is coming to the table about what is happening now in 2011 and 2012, and I am sure that officials and Ministers will want to take that into account.

Q220 Oliver Heald: But of course the idea was to have a review in 2017, after implementation, wasn’t it? Of course, now that implementation has gone back a year, it is not. So there is a different circumstance there, isn’t there?

Lawrence Churchill: I think there is a different circumstance, and in many ways setting a review for what was at the time 10 years hence perhaps did not recognise sufficiently how much change there would be in the marketplace for provision and demand, as well as in economic circumstances. That argues the case for keeping your eye on the ball rather more frequently than every 10 years.

Q221 Oliver Heald: Do you think that if the restrictions were removed once at least some employers had made their choice, some of them would then choose to transfer to NEST? Would there be a move away from other providers to NEST if the restrictions were removed?

Lawrence Churchill: It is difficult to forecast how other people will behave, but I would not expect so. I think that once big decisions were made about pensions provision they would tend to stick. I am not sure that NEST, however attractive it is, would be sufficiently attractive to make employers take on the massive switching costs of moving from one provider to the other.

Q222 Debbie Abrahams: We have had some evidence that removing the current cap on contributions would save state aid to the value of about £100 million. Is that broadly in line with your estimates?

Lawrence Churchill: Again, it is a difficult question, if the question is about state aid. There is no doubt that the letter from the Commission mentions the restrictions, but of course it is the existence of the public service obligation (PSO) in its own right that creates the possibility for state aid. In the way that I read the paper, the test in general was more about what would be the normal commercial practice as the test case for saying, "Well, if NEST is getting funding or is fulfilling a public service obligation in excess of that, what’s the right degree of state aid that might be applied?" Obviously, if the restrictions were to be removed, no doubt people would want to look at that again, and that is absolutely fine, but we haven’t made any individual estimate of the impact of isolated pieces. Indeed, I think that it could be argued that the PSO itself is sufficient to maintain the case.

Tim Jones: As the person charged with implementing the cap, I am happy to tell you that it is my least favourite aspect of my job. It is very difficult to implement. The cap applies per person per year, but the duties apply per employment, and those are chalk and cheese. Making this thing work is very hard, and it seems odd to us, as we are now enthused by our member interest test, that members of other pension schemes can put in up to £50,000, but somehow members of NEST, who are paying for the creation of NEST with interest, so the taxpayer loan is being repaid, are restricted to a much smaller amount.

So I can’t say we like it. In my role as a sort of product champion you would not expect me to say that I liked it, but whether it should be removed is not a matter for us. We can provide evidence of its impact. An obvious impact is that firms with a couple of higher-paid employees have to look to a second scheme, which is a burden that I do not really think was intended, so the issue is whether the continuing benefit of that restriction and the other restrictions outweigh the disbenefit of the burdens that they impose on both members and employers.

Lawrence Churchill: It is not just the employer burden. There is evidence-for example, I read the Pensions Policy Institute submission to this Committee in which it points out that the cap is an impediment to a women aged 40 with career breaks saving for a decent pension. We provided a sort of table in our own submission in which, if you take the National Association of Pension Funds’ Pension Quality Mark PLUS standard of 15% contributions, the cap bites at £28,000 salary-about the median. If you take the old adage of, "If you are starting to save for a pension, you should put aside half your age as the rate each year," as a general rule of thumb, for anyone starting their pension aged 40 and using that mechanism-20% contributions-the cap bites at £21,000, which is below the median. I am not sure that the full impact has been thought through, and perhaps it should rather be based on the minimum contribution level, which gives you the £50,000 figure which Tim referred to, with which we would have no argument

To make it clear what is being referred to

Q223 Debbie Abrahams: May I ask a broader question on the EC approval of state aid for NEST? Do you think that the restrictions are very much tied into the approval that the EC gave?

Tim Jones: Actually, the state aid is a Government matter, because it is the Government who ask whether they can have permission to grant state aid. We are merely the recipient of it, so how the mechanics of state aid play out is really a question for Government. I can tell you how they play out for us. Our loan from the Government is charged at the Treasury’s commercial rate-the relevant commercial rate that the Treasury sets-and the political consensus around NEST was that the initiatives should be funded at nil cost to the taxpayer. That has been interpreted as: the interest that we pay back should be at the Government cost of borrowing, so the net effect of the state aid is to reduce our interest payments from that commercial Treasury rate down to the Government’s cost of borrowing, but not below that.

In fact, therefore, the quantum of aid that we are receiving is significantly less than that that would be calculated from the PSO-the public service obligation not to say no to any employer that wants to use us as part or all of their response to the duties. The detailed mechanics of the extent to which the restrictions or the change in them would alter that is really a matter for Government, who were the entity who asked for and received permission to grant the state aid.

Lawrence Churchill: But it is at least arguable, I think, that because we are providing a service of general economic interest via the public service obligation, the case could stand on the PSO alone. But that is a discussion that will take place elsewhere.

Q224 Karen Bradley: I want to cover the transfers into and out of NEST. The Government have said that no one will be able to transfer their existing pensions into NEST. What is your view on that proposal?

Tim Jones: The transfers ban obviously works both ways. I am happy to deal with the transfers in ban, which is your direct question. The issue it poses is that if you are a large corporate and you have grown by acquisition you are typically seeing automatic enrolment as a very big change to your benefits position and your benefits strategy. Most employers are taking this opportunity to stand back and say, "Okay. Let’s now consolidate into a coherent benefit strategy what we want to do with pensions as part of our overall package." The problem with that restriction is that you cannot include NEST if you are trying to consolidate from a number of pre-existing pension schemes, which you may have acquired through acquisition, into a more coherent pension arrangement for the new corporation that you are. That is a direct effect.

What we are finding in our research is that when we ask employers whether they are considering NEST, the two principal restrictions of the cap and the transfers ban both ways take us out of consideration relatively early, before they have actually had a chance to understand how the product works and how it might be a good fit for their members. In the sales jargon, we are being removed from consideration early. That is a concern for me because it stops the policy objective of NEST playing the role in large corporates that it was intended to do, for lower-paid workers, for workers who only stay perhaps for one or two years, which is a core role of ours, as well as servicing smaller enterprises that are unattractive to the private sector. The concern is that that removal from consideration early stops us playing our full role in achieving the policy intent in the large and mid corporate market.

Q225 Karen Bradley: So do you feel that if that restriction is perhaps removed in 2017, if that is when the review happens, you will already have lost a great deal of market share as a result?

Tim Jones: I back up what Lawrence said. Yes is the short answer. This will be a big wave of corporate decision taking. They will have a review cycle but it might be 5, 7 or 8 years. Once this wave of decisions is taken, the die is then cast for a considerable period because these are big changes.

Q226 Karen Bradley: So why do you think the Government put the restriction in place for transfers into NEST?

Tim Jones: Well, that is absolutely a matter for Government. They were in the 2006 White Paper and I joined this initiative in October 2007 so they comfortably pre-date me. I just thought it was what it was and it was part of the political settlement. I have described this consensus as being strong but relatively rigid. Like all good consensuses, everybody says they have lost something and everybody says they have gained something. 2012 is a new place compared with 2007. Therefore as the reality of how this initiative, by which I mean automatic enrolment, is playing out emerges it may be appropriate to look again.

Lawrence Churchill: If I could offer a perspective, I was not round here at the time either, but it would be a legitimate concern to insurance companies at the time that people who had built up, say, £250,000 in their pension pot with them, suddenly were able to escape to a lower-cost scheme when the provider had made the investment and so on. I can see that as being legitimate. So I guess it was some form of thinking around that that then created the ban. But I think the implementation of the ban is, as I said before, rather a sledgehammer to crack a nut in that it is impeding transfers and so on. I must say that no matter what our opinion of the restrictions and so on is, our competitors certainly think that these are reasons why you should not choose NEST. If you look at their marketing materials they do comparisons and point out that NEST is a restricted product.

Q227 Karen Bradley: We have had evidence that although it was the Government that stopped transfers into NEST, it is NEST itself that stopped the transfers out. Could you give the Committee some information on why that decision was taken?

Tim Jones: Absolutely. That is not true. The evidence for that is that in the White Paper of 2006, the transfers ban in both directions was present. That pre-dates even the creation of PADA in July or August 2007, my arrival in October 2007 and the creation of NEST in July 2010. So it is way back in the consensus-building post-Turner that that comes from. In the consideration of the Bill that became the Pensions Act 2008 we were asked our opinion, because after that comment here, we went back and checked, "Were we involved in that?" Our opinion was that it would be sensible to review both restrictions at the same time, but the fact that they were being proposed-both-pre-dated us.

Q228 Karen Bradley: So the transfer out is also a Government restriction. It is not something you have asked for.

Tim Jones: Correct.

Q229 Karen Bradley: And you would like to see it removed.

Tim Jones: As the product champion, it is obviously, in our narrow view, not a good thing to have it. It is not for us-in a sense, nobody elected us-to say whether it should be removed; it is for the Government to decide whether the net benefits of the package are still in play, or whether the net disbenefits are in play and therefore it should be reviewed.

Chair: We move on to a controversial point, which is the whole idea of levels of charges and regulation.

Q230 Brandon Lewis: With your scheme, there are two types of charges; the annual management charge (AMC) as well as the contribution charge. With organisations like Aviva saying that within a 10-year policy, they are more cost- effective with a clear 0.61% charge, does that not give you a market problem in terms of competitiveness, and how do you deal with that? Equally, would a single clear charge like that make it easier for employers and employees ultimately to understand what they are paying for and what they are getting?

Tim Jones: We are absolutely committed to clarity and transparency in communicating our charge structure. The notion of the balance of benefit between the simplicity of a single-charge structure and other charge structures is very important. There are actually quite strong benefits from having our structure; the taxpayer gets their loan repaid faster and the members pay less interest in total, because the contribution charge elements accelerate money coming in to us in the earlier years of the scheme. We have said that over a 10 to 15-year period it equates to 50 basis points, and that is probably consistent with the figure you just gave. John Cridland1, who is not a fan of it, said that it was equivalent to 43 basis points.

So, what we say is that is roughly equivalent to 50 basis points, over what I would call a normal pension term. If, though, you cease contributing, you immediately drop down to 30 basis points, because no contributions are being made and therefore there is no charge. There is no concept in NEST of a deferred member penalty. It is not that your charges go up when you cease contributing. I cannot, and neither would Lawrence, pre-judge what the trustees of the time would do, but our clear intention is that when the loan to Government is repaid, the view would be to move the contribution charge element away, so that we achieve what was the original Turner ambition of delivering that service at 30 basis points. Our modelling says that is achievable, post the repayment of the loan, and that is a very exciting place to get to, to service people in smaller enterprises, and lower-paid and transient workers in larger enterprises who are just not served at all in today’s market-not remotely at that price level.

Q231 Brandon Lewis: I think you are right, and from our point of view, that is interesting and potentially exciting down the line, but the period in which that loan is paid off and you get to that stage is not in the short term. How do you make sure you can get to that point? I mean that from the point of view that if you have organisations like Aviva or Legal & General were talking about having one, clear transparent charge, which they found to be a big, marketing issue for them, beneficially-competing and being able to market to their customers this clear, simple, cheaper product, in their words, how do you deal with that competitively to make sure you can get through the short term, to get to the point where you can be cheaper again?

Tim Jones: The answer is that in major and mid-corporates, it is through our work with employee benefits consultants (EBCs), and with the small amount of work we do directly with larger employers. Employee benefits consultants have very detailed assessment processes and they create things called tender response documents, which we fill in and send back. I am satisfied that the larger EBCs are properly and professionally representing our charge structure to employers, and as we discuss NEST either directly or through them, the NEST charging structure is not an impediment to their consideration of us. I think that most people feel that an equivalent of 50 basis points for the coverage we provide is already an excellent deal, and prospectively going to 30 is exciting.

Q232 Brandon Lewis: If that is the case, why are organisations that will ultimately, when we get to that point, be dealing particularly with the small and medium-sized enterprises-such as the Federation of Small Businesses (FSB), which I think is the largest business membership group-saying that there is so much concern among their members they are looking at setting up their own scheme, which their members will know about and be able to understand and trust, rather than allowing NEST to just be the default option?

Tim Jones: The FSB can speak for itself, but as I understand it, FSB member services offers a range of services to its membership, and the deal that it has announced with Scottish Widows makes sense to me as an observer as being another service to offer alongside all the other things that people join the FSB to take advantage of.

We are very confident that the NEST proposition will resonate with a lot of folks, and it is very important to remember that none of the folks that are in the market alongside us, whether it is Scottish Widows, NOW or any of the others, actually wishes to take on the PSO. So, we have a central role to play, we believe, in making sense of these reforms, because in order to get us to that wonderful place that Australia has got to, where workplace pension saving is the norm right across society and right across enterprise, there needs to be an entity to pick up the PSO so that there is a service available to every employer.

Q233 Brandon Lewis: Obviously, I would not ask you to give away anything commercially sensitive, but is there a simple answer to how you deal with the risk, when this fully kicks in, of other organisations deciding to come into the market and undercutting you early on to the point of damaging your ability to survive, in order to benefit from profits down the line, which would effectively be disadvantageous to the employers as well? I understand the points you are making, but how do you get that over to the end users to the point that they will want your product above something they might see as simpler and effectively cheaper?

Lawrence Churchill: I am not sure that some of the companies you reference would adopt that sort of tactic, but as Otto Thoresen2 said to you a fortnight ago, "I can see why you would be suspicious". We obviously have to react to the market strategies of other players, and I think that transparency and public scrutiny are the answers here, to make sure that no one comes in at a bargain basement price and then gradually increases it through a multiplicity of charges later on.

We support the work that the NAPF is trying to kick off, in terms of how you get transparency of charges. It is simple and appealing in a sense to go to a single AMC as your own currency, but as Tim has already said, people using AMCs have multiple AMCs, and you are never sure which one you are getting at any point in time, and when you stop paying contributions, the costs suddenly go up. Even in the beguiling simplicity of one currency, there are complications. Work will have to take place in the period ahead to try to find comparative measures, and probably there will end up being more than one, in my view, in which you can go back to a tariff that the industry is offering. But only public scrutiny is going to out-if I can use that expression-strategies that go in pretending to be one thing and in reality a few years later appear to be something else.

I think that NEST has already had a powerful impact on behaviours in the marketplace, across a wide range of dimensions from governance to communications to charges and so on. With the prospect of NEST coming down to a 30 basis points charge a decade or so away, I think that the competitive pressure exerted by the existence of NEST is going to keep competitors honest. The public scrutiny and comparison will be there, and it will be a real option for people and employers to realise when they are being seduced by charges that do not appear to be what they say on the tin.

Q234 Brandon Lewis: I appreciate that you made the point a few minutes ago, that obviously you today cannot bind trustees of the future but, quite rightly as well, talking about transparency and knowledge, if we are continually talking about a decade or so away from 30 basis points, that in itself will put a pressure on people in the future to live up to that, because they will come to expect it. That matches up with transparency. So do you think that, with the work that the NAPF are doing and this kind of transparency that auto-enrolment, NEST and what have you can bring to the market, that will be enough, or do you think that it would be helpful if the Government were looking at caps in order to protect people down the line from this potential for high charges later on in a policy?

Lawrence Churchill: I would say, let us see where the industry initiative gets to. NEST is not in favour of talking shops, so we do not want to engage in long conversations about how difficult it all is and yet nothing ever happens. This is a case in which actions speak louder than words. After due time, whatever it is-a year maybe-if there is no concrete resolution coming out of discussions like that, then I think it is entirely for Government to consider what the most appropriate response is. Personally, I do not like arbitrary caps of any sort, because they tend to create incentives to go to the cap and not to go below it, as we saw with stakeholder pensions, for example, 10 years ago.

Tim Jones: The only thing that I would add to that is, if you think of stakeholder pensions as a viable cap-that is, 1.5% for 10 years and then 1% thereafter-that is very expensive in the context of the figures that we have just been talking about, about what our actual charges are and, prospectively, what they should be. My personal view, for what it’s worth, is that having an active competitive market which is creating price pressure because there is real choice is a very effective way of managing these issues.

Q235 Brandon Lewis: In that sense, that price pressure in a competitive market only works if it is understandable and therefore transparent.

Tim Jones: Right.

Q236 Brandon Lewis: With that in mind, and with the Pensions Regulator going to have a huge amount of work to do, is there anything specific you think that the regulator should be focused on in order to ensure that, to enhance matters and generally to make sure that obviously the policies that are on offer are genuinely good for employees?

Lawrence Churchill: I think the regulator ought to be focused on outcomes for members, for sure, and obviously on employer compliances as we go forward, on the quality of record-keeping, which is a very, very important issue over the longer term. And it should be risk-based in everything it does. So where it sees a risk, it should switch its resources towards that risk and address it. We will certainly support and help the regulator in any way that we can. We would like to see all that it does being proportionate, which also goes to the charges or costs of regulation itself. The trustees will be concerned that a large organisation like NEST-measured by members-which we hope is very well governed and relatively safe, does not bear a disproportionate cost of regulation. So we will be pressing for proportionality all the way.

Tim Jones: But we are involved in the NAPF’s charges initiative, and we have got a representative on the working group.

Chair: On to investment strategy, and Harriett has some questions.

Q237 Harriett Baldwin: The 22-year-old who joins NEST and invests with you until they are 29 will look at their account after 7 years and see that they have just kept pace with inflation, and yet a colleague who may have joined a different organisation that might take a somewhat more risky strategy, in terms of investing its portfolio, could potentially have a much larger sum by the age of 29. We have had some witnesses who have suggested that the investment strategy is too cautious. How do you respond to that criticism?

Mark Fawcett: That is a really good question. The important thing is to understand the risk appetite of our future members. We have done a lot of research, backed up by sessions with low to moderate-income workers, some saving in pensions and some not. Their reaction to the idea that they might be automatically enrolled into a pension scheme was that they might then have an outcome where they start losing money after year one or year two. If you are investing wholly in equities in the stock market, which is very standard, you can lose 25% or 30% in a year in a matter of months, as we saw in 2008.

So the very strong message we got from our potential members was, "You need to manage the risk of the investments. Taking extreme or unnecessary risk is not what we want. What we want is to build a pension steadily." Ultimately, if you are going to build a pension from the age of 22, you have to keep on saving. When you retire, 50% of the size of a pension pot is typically made up of contributions and 50% is from investment returns. So if you stop saving after 3 or 4 years because you just do not like the volatility and because you have been scared off by big falls in the stock market, you are never going to build a pension.

Q238 Harriett Baldwin: All the evidence of behavioural finance from the 401(k)3 market in the US supports the view that people hate to see volatility. If they are given the autonomy, they invest almost invariably in cash or building society type accounts. I agree with that, but what you have got at the age of 22 is time on your side. You have 45 years to experience the higher rate of return that you can get from investing in the stock market rather than the CPI equivalent, which is probably not even as good as a building society account. Should it not be your role to default people into something that is going to take them into the place where they will enjoy the benefit of being able to take that long view with their investments?

Mark Fawcett: First, the lower-risk approach-what we call the foundation stage-is not no risk. Secondly, it only lasts for a few years, when the amounts of money invested are really small. If we compare someone going into the foundation stage and then into our growth stage-if they join at 22 and leave at 67-with someone just going straight into the growth phase, the difference in outcome is less than 1% in terms of their expected return because the amount of money they have got invested is so small. The work that we did showed that, as you say, everyone hated risk and volatility, but the people most likely to act adversely were the very young-for example, people in their 20s. The fact is that it makes no significant difference to the outcome, but if we reduce the volatility for 22-year-olds and 23-year-olds, it is more likely to keep them in. It seemed to our trustees that the right decision was to give them the slightly lower risk start, keep them saving and build up confidence in savings, so that when it pays to take more risk in the growth stage, they are still saving and they are happier to take that risk.

Q239 Harriett Baldwin: Your argument is that suddenly at the age of 30, because there is a bigger pot already accumulated, that volatility is not going to affect them.

Mark Fawcett: Although everyone says that they hate volatility, as people get into their 30s, because they are more mature or they are just getting more used to saving, they are much less likely to react adversely to volatility. So the 22 or 23-year-old might say, "I’ve been saving in this for a year. I’ve lost money. Why am I doing that? I’m going to give up." At 30 or 35, people are more mature. As Tim said, they are used to saving and think that it is just something that you do-you save for a pension. They will see some volatility and more volatility, but, at the same time, they will be building a pension pot.

Lawrence Churchill: Perhaps I could add, Mark, that you have absolutely correctly addressed your answers to our default fund strategy. We have other funds as well. If there is a 22-year-old who is already a millionaire because his first dotcom business did well and he is saving and feels very adventurous, he can go into a more adventurous fund. It is available to people. Our default fund, where we expect the majority of our members to be, is built entirely upon the research we have done with those members and their characteristics. As you absolutely correctly point out, we want to do better in economic terms-in terms of return-for our members than the 401(k) experience in the States.

Q240 Harriett Baldwin: So the default funds will be by age group.

Lawrence Churchill: Yes.

Q241 Harriett Baldwin: Would it be possible to set standards for investment strategies for all the default funds, and if so, would it be necessary to define the characteristics of the investment, or the process for deciding on the investment strategy?

Mark Fawcett: Could I just clarify what you mean by standards?

Q242 Harriett Baldwin: I think we heard evidence in earlier sessions that there is quite a wide leeway in terms of what it might be invested in.

Mark Fawcett: In terms of the amount of risk we take, we’re very clear about how much risk we take at different stages of a member’s savings career, and we will manage that risk. Just as NOW: Pensions said a couple of weeks ago, typically people invested 80%, 90% or 100% on the stock market, and that’s too risky. We agree that’s too risky, and we’re taking a more diversified approach, so we’re investing members’ money in a variety of different investments, seeking return. We are taking risk, but not unnecessary risk. Typically, we are taking less risk than 100% in the stock market, but we are investing in global equities, emerging market equities, emerging market debt, corporate bonds and property. We’ll continue to believe that we should diversify the portfolio, but seek returns well in excess of inflation.

Lawrence Churchill: And our trustees, the investment committee and your team, Mark, look each year at the prospects and where the markets are going, and dynamically alter our asset allocation to make sure we are positioned as correctly as one can ever judge the future.

Q243 Harriett Baldwin: That is very interesting, because asset allocation is one area that people don’t feel anyone can add much value in, so I am quite surprised to hear you say that.

Lawrence Churchill: Correct me if I’m wrong, Mark-he is our chief investment officer-but we think that return is probably predicated more on asset allocation than on, for example, stock picking.

Q244 Harriett Baldwin: Ex post. But ex ante is very difficult to get right.

Lawrence Churchill: Ex ante is very difficult. I agree.

Q245 Harriett Baldwin: You believe you can add value in that area.

Mark Fawcett: Our approach to asset allocation is to manage the risk of the portfolio, so that members’ experience of volatility is relatively constant, and the amount that the portfolio goes up and down typically in the course of a year is relatively constant. Sometimes stock markets or corporate bonds are extremely risky and extremely volatile, and we need to manage that risk, so if you think about the strategy that invests all the time in equities, that can be an extremely bumpy ride. A 29-year-old who has invested since 22 and who you postulated might have got an extremely large amount of money, might also have lost a large amount of money compared with his original investment by being just in the stock market. We think it is really important not to be dependent on one particular asset class, but to spread your investments and not to put all your eggs in one basket.

Q246 Harriett Baldwin: Diversification is the only free lunch in investments, so I completely understand that, but are you saying that you will try to manage to a constant flat-rate risk?

Mark Fawcett: Yes. We look at a variety of risk measures, such as volatility and value risk-I’m sorry, that’s jargon-which is the amount of money you might lose over a certain period, whether one year or several months. We try to make sure that we can manage risk. It doesn’t eliminate the risk-you have to take risk to get investment returns-but we will manage the risk through the savings career of the member. We don’t say, "Equities are so over-valued, we’ll sell them all." We say, "Equities at the moment are volatile; we’ll reduce the risk exposure."

Q247 Harriett Baldwin: I do exactly understand what you are saying, but the implication is that you are going to have quite a high level of turnover in your portfolios, which is quite expensive for the person investing with you.

Mark Fawcett: The level of turnover actually is really low. We are not trying to manage for every twist and turn in the market, but there are periods where it does rise for a considerable period of time and we can reduce our exposure to those volatile assets for a considerable period of time. Our last allocation is absolutely strategic, so it takes a long-term view, and we are not trying to do what people call market timing, which, I absolutely agree with you, is really hard to do.

Q248 Harriett Baldwin: Moving on to the other end of the life-cycle-you have done this all your life, you have built up this lump sum and you approach converting that lump sum into a retirement income. Could you go through that approach and how it might offer lessons for governments, regulators and other providers?

Mark Fawcett: If I could start 10, 15 years out from the point of retirement, as you say our members will have built up a significant pot at that point and the important thing is to get a retirement income out of that pot. They will be exposed, as we have said, to fairly risky assets, and between 15 and 10 years out the investment approach is to start reducing exposure to those assets and to start investing, typically in gilts and corporate bonds, to manage the conversion risk, as it is called. Basically, people are going to buy a retirement income, generally through an annuity, and annuity prices move up and down, so we need to manage the risk relative to that annuity. What we call the consolidation period typically lasts 10 years, so at the point of retirement the member’s portfolio will be 75% in gilts and corporate bonds, and 25% in cash. People typically take the 25% as a tax-free lump sum and the 75% provides their retirement income.

The approach we have taken to buying retirement income is to buy an annuity, which is a once-in-a-lifetime decision. Most people, by definition, have never engaged with annuities. They do not really know what they are buying, and by the time they have bought it, it has come too late. There is a lot of evidence that people typically do not buy the right product.

The approach we have taken is to develop what we call a structured choice tool, which guides people through a fairly simple set of questions about their personal circumstances, their health and their lifestyle habits, which help them to arrive at the right product decision for a retirement income. So, for example, if you are a smoker you would expect to get a better annuity rate, so we ask people, "Do you smoke? If so, how many cigarettes do you smoke?" Once we have gathered that data, we have a retirement income panel of five annuity providers. We send the data out to all those providers, and they will come back with quotes. The member can see which is the best quote and which is the worst, and it is rational to buy the best quote, which will give them the best income.

We think that is a significant improvement on the default. What typically happens these days is that you tick a box from your pension provider and they give you a single life level annuity, irrespective of whether you are married, whether you smoke, whether you have diabetes or whether you are overweight, all of which will change the retirement income you get.

Tim Jones: We absolutely provide access to the open-market option for all people coming out of NEST. That is one of the many things that it is typically said that we don’t, but we do. As well as the retirement income panel, we do provide access to the open-market option.

Q249 Harriett Baldwin: It is said that the 8% contribution under auto-enrolment is going to provide a better replacement income-a lot of people are currently not expecting any-but it is also not going to provide a particularly generous retirement income. What can the industry and the Government do to encourage higher contributions?

Lawrence Churchill: The 8%, which is often misunderstood, is a minimum for the auto-enrolment system at the moment. It would be odd if the minimum contribution that you made got you the maximum income in retirement. It would be very odd indeed. I don’t think there is any doubt that for many people, 8% may not be the most appropriate figure in their circumstances. It is merely the minimum starting place.

What can the industry do to engage in how to communicate the concept of adequacy? I think it is down to communication and it is down to being honest. It is down to not betting that equities are going to work or any risky asset class is always going to come out on the upside and not the downside-you have just had the conversation with Mark. It is trying to communicate a balanced risk approach to what you are likely to get for the money that you are saving. Over time, I hope that we will be able to socialise some saving norms for people in various circumstances, such as the one I mentioned earlier: half the age at the time you start would be the percentage. It is clear that the number should be higher than 8% for many people. We need to guide them with the industry to make an informed choice about how much pay they want to consume now and how much pay they want to defer so that they can continue consuming in their retirement years. Essentially, that should remain a personal choice for families.

Q250 Chair: Most members can choose to invest in an ethical fund, so what might some members consider unethical in your default fund?

Mark Fawcett: We have done quite a lot of research into member attitudes and how they would like their money invested. We have an approach that we consider as responsible investment for all our fund choices. Basically, we will engage with companies and will have our shares voted on issues such as the environment and on social issues such as human rights and the treatment of the work force. Those are the issues that the potential members who we surveyed think are extremely important. In addition, the ethical fund excludes industries such as tobacco, arms and alcoholic beverage producers, so it eliminates certain industries that are generally considered by some people to be unethical.

However, whether you smoke or not is a personal choice, and whether you think smoking is bad or not is a personal choice. In addition, we also have a sharia fund that allows people with Islamic belief to comply with Islamic finance, so that excludes alcohol, arms and financial companies. We have a range of choices for people who have particular beliefs, and we think that is really important. In an automatically enrolled environment, where you are enrolling people with a variety of different needs, to have some choice that meets their needs is absolutely appropriate. Employers as well as employees have told us that.

Q251 Karen Bradley: I am interested in what you are saying about having the different types of funds, particularly the sharia fund. How will an employer manage? How easy will it be for them to deal with you when they have got employees who want to be in all the different funds, and how much more complication is there in their lives as the employer?

Mark Fawcett: I shall pick up the bit about communication, and then Tim can perhaps say how it might work for the employer. We have gone for a focused fund choice, so we have five funds in addition to the default fund. There is extremely strong behavioural research that shows that if you give people too much choice, they just get confused. They will come and ask questions or they will go into a default fund when that might not be right for them. So, we have five fund choices. It is very clearly explained what each of those choices is designed to do. There is a lot of self-service here. People can make an informed choice very easily. If people can make that informed choice, they will not be a burden on their employer. They will not be coming to ask advice and so on.

Tim Jones: Our design presumption is that very many of the employers that will choose NEST will have no expertise in answering questions like that at all. If you think of the hundreds of thousands of micro and small enterprises that will come in from 2015, the presumption has to be that those people are very good at what they do, which is mostly not anything to do with financial services. Being committed to transparency and clarity of language, and researching carefully how we talk to members about this limited fund choice, we hope that with the scale that we envisage it will become something that people can talk about in the pub. They can say, "Well, I’ve stayed in default," "I chose the ethical fund," or, "I’m a Muslim and I chose the sharia fund." There are not so many choices that it is an unfeasible conversation. There are not 350 of them; there are five outside of default. We are working as hard as we can, and will continue to do that, to create communications that take what is an essentially technical area-investment-and, without dumbing it down, try to make clear statements, through our fund factsheets for example, about what each fund does and why people might wish to consider it.

Q252 Karen Bradley: From the employer’s point of view-suppose they have employees that are in the default fund and the other five funds-do they just pay over an amount of money, and you allocate it?

Tim Jones: Absolutely. The process is that everybody is put into the default fund because everybody is defaulted-in through automatic enrolment. The member then chooses to elect for a different fund choice. Our view of our membership is that this is for life. NEST membership arises in the context of one employment, but three or four employments later, the employer at the time is putting money in, but your fund choice reflects all the money that has come in over the different engagements that you have had. That will mean that people will understand that this is their NEST account. Hopefully, as we engage with them we will encourage them to manage it as their account, regardless of the employment at the time that gives rise to those contributions, or indeed voluntary contributions that they may be making on their own behalf.

Q253 Karen Bradley: Do you have any plans for a situation in 20 years’ time, for example, where the ethical fund has grown dramatically and the default fund has not, and the employees are sitting there saying, "We work for the same business; we have the same employer and the same profile, but you’ve got a much bigger pension pot than me"?

Tim Jones: Mark can comment on the likelihood of that, but I think that people are going to make their fund choices based on their beliefs and their risk appetite. Essentially, our four main choices outside of default are higher-risk-carefully named-and lower-growth. That is also carefully named because, let’s say that we are CPI4 plus 3 in our growth phase, we are saying to people, "Look, CPI plus 5 is not a one-way ticket. You have to create more risk, which risks more volatility, to go for that." We have a higher-risk fund, a lower-growth fund, an ethical fund and a sharia fund. Those are the four principal choices outside default, and we think that people will then realise that that is what they are in.

In practice, comparison across will be difficult because everybody’s savings history will be unique. They will have been in work and out of work and they will have got the pot size that they have got. So I don’t think that that direct comparison will feature much.

Mark Fawcett: Our ethical fund has a risk profile that is very similar to the default fund. The intention is not that because you have a certain set of beliefs and want to invest in the ethical fund you have to have all your money in equities and a very risky strategy. We have a risk-managed approach with lifestyling, and we have been told that this is the only ethical fund that is lifestyled. We want to manage the risk through the member savings career for investors in the ethical fund, just as we do in the default fund.

Q254 Sheila Gilmore: What feedback have you received from employers and employees about your communication materials?

Lawrence Churchill: I will give an overview, and then perhaps pass to Tim who has rather more direct feedback. I am pleased to say that it has generally been incredibly well received. People think it is a breath of fresh air that some of the jargon has been removed from the industry. We have continued to show very engaging footage of conversations with real people out there in the streets. Some are eminently qualified in their own profession but show a low appreciation of financial jargon, and are actually put off by it and frequently misunderstand it. They regard what we are doing as a breath of fresh air. I would hate to say there has been universal praise, Tim, but it is not far off, is it?

Tim Jones: What is fascinating is that the feedback is very clear: people do not want to be dumbed down. Their tolerance, though, of our jargon-that is, jargon from the world of pensions-is negative. It is not zero; they are cross when they are presented with jargon. They say, "We don’t mind you taking a few more words, but please make them English, so that we can understand what you’re saying. We want to understand it, but we have very little tolerance." There is a wonderful vox pop on one of our videos of a medical student, who is almost shaking his "Gray’s Anatomy", saying, "I’ve got my own jargon, thank you very much. I can do without yours. I’ve got enough in this big book here." We took that to heart.

Our philosophy is to set things out as plainly as we can-hence the NEST phrasebook. We will continue to work with that, but the response so far to the website has been very positive, both in the research and now among our hundreds of members-the nearly 50 companies that are live with NEST, and I am delighted that we are live this year, a year ahead of when we were due to start.

Now, we have not done everything right, and that is one reason we launched a year earlier. We know-I know-from devising new products in the past that you never get it all right, but we are going to work hard to make things even better. We are very pleased that the core, the tonality and the language, and the way we express ourselves resonate strongly with the target market-they should, because they were researched to do that-and we have a great platform from which we can develop. But this is a journey, and we will be doing a second version of the phrasebook early in the new year.

Q255 Sheila Gilmore: Do you think others could learn from that?

Tim Jones: We are saying that what we have done works for our target market. It was in response to early research, where people said, "I don’t know what the question is. I can’t answer your question in the research because you’ve used a jargon word that I don’t understand." We had to step back and think, "Oh my goodness. Okay, how do we actually talk about this stuff?" We have shared these things broadly, but we are saying that we are focused on our target market; we are not presuming that that approach is right for all elements of the market, although it is interesting that you could say the DWP’s communication work draws heavily on what we have done. With different audiences-especially professional audiences, such as the investment community and the employee benefits consultants-we go all the way into the jargon of the industry when we are providing technical answers in a tender-response document. So we are tuning the language to the needs of the audience.

Lawrence Churchill: As far as consumers are concerned, we are strongly supported by the ABI5 and others, who want us to take the lead. A year or so ago, Tim and I had a meeting with the chairman of the ABI, who said, "We believe strongly in communication. We have tried to do some ourselves, but we have such a broad and diverse membership that it’s difficult to get cohesion. Will you please take the lead, and we will follow and support?" It is not as if we have set out in contrast to the aspirations of others. This is perhaps one of those areas I mentioned where actions are louder than words. Tim’s communication team has done a great job in showing what could be done, and that is having traction.

Tim Jones: We are very grateful for the engagement of many parts of the private sector. JLT, for example, invited us to view its work on mobile applications, which it has been using in South America and South Africa. We are very grateful for that. We want to be part of an industry that, in a sense, realises that this product area-workplace pensions-is going to become normal. That makes it more of a consumer product, so it has to step up to the clarity of communications that consumers expect from mainstream products these days.

Q256 Sheila Gilmore: What level of service will you be able to provide to any employers who cannot fulfil their responsibilities online?

Tim Jones: We thought very carefully when we designed NEST and looked at that topic area of online versus paper, both from the employer perspective and the prospective member perspective. The conclusion was that we were going with the flow for both communities, in being predominantly online, but that a minority of members would require paper, so you can opt for a paper annual statement from NEST and receive that going forward.

On the employer side, the fact that the Inland Revenue submission is mandated as being online meant that nearly all employers had to have the capacity to work online somehow. Our principle response to it is not to provide paper for employers, because that is really very expensive and we do not believe it is in members’ interest; but it is to provide a service, where we have worked hard to create a concept we call "person acting on behalf of". So you can be nominated as a person acting on behalf of an employer. That is quite a rich concept, so you can delegate-"You can do this but you can’t do that"-for different people in your environment. So if you have somebody who does your books, if you are a micro; if you have outsourced payroll, whatever it might be; that person can work with you if you are a paper-based person.

We are in a sense saying our costs are limited to providing an online environment, but there is a facility for people to work with employers if they want to go to paper. It is also-that same facility-very important to support the 300-plus languages that are spoken in the UK, where we have that concept, both for employers and for members, that people who do not have English as their main language can nominate somebody to act with them and for them in different ways and bridge that language divide.

Q257 Sheila Gilmore: Finally-from me, anyway-how will you ensure that employers hand over the contributions on time?

Tim Jones: This is a fascinating and important topic, as the duties of workplace pensions reach into employers that have traditionally not offered workplace pensions. I am not pretending that we have all the answers. What we have done is to set up a system where all employers are notified before a payment is due-each time a payment is due. They are then notified if the payment is late, and we go through a series of notifications. We then obey the Pensions Regulator’s rules for, in a sense, handing the file over to the Pensions Regulator if the incidence of breach is beyond a certain number of times. That is set out in its regulations. We think it is for it to take whatever action-as Lawrence said, risk-based-to meet its duties of ensuring employer compliance.

You could ask what more we might do, and then Lawrence and the trustees would quickly say to me, "Whatever we do, Tim, has got to be in members’ interest, so tell me what the member interest test is." When we have got hundreds of thousands of firms in, there is clearly a challenge to work our way through, as an industry, to manage this topic area. It is an important topic area. We have given it a lot of thought. We will make it as easy as possible for people to make their payments.

One of the things I am interested in is smartphones; lots of small businesses will have exactly the same schedule each time, and if they can just do it with 4 or 5 hits on a smartphone screen, while they are doing their normal everyday business, to trigger a transaction, then that is one way of making it easier.

We have also been asked-and this is completely against the history of pensions-to provide, effectively, a standing order facility for the smallest employers, where they do not have to trigger each payment. Traditionally, employers have always wanted control over cash flow, and have wanted the power to manage each payment, but we have been asked by micros to consider providing an effective standing order, where they are saying, "Look, it is the same people; they earn the same amount of money. I pay weekly; I don’t want to do this every week. Just allow me to have it set up so that it triggers, and then I’ll go in and change it when something changes." So we are in the process of designing that.

Q258 Stephen Lloyd: I think you are right. I think all those sorts of systems will make it easier, but you and I know that you are always going to have that percentage of people-whether it is the plumber saying they will turn up, although they never do, or an accountant-who will be problematic. My experience with that is that at some point fairly early in the cycle, I anticipate that there are going to have to be some quite public cases against employers who just don’t bother. In my experience, one of the best ways to assist those recalcitrant groups is to put the fear of God in them a wee bit. Realistically, is it part of your understanding that you may need to do some of that?

Tim Jones: We don’t think that that is for us. We think that that would be for the Pensions Regulator.

Q259 Stephen Lloyd: So NEST is going to be very careful. It’s just going to be the provider. I understand where you are coming from, where you are going to manage the pensions. So no aspect of "bad boy" is going to be related to NEST?

Lawrence Churchill: We have no enforcement powers at all. That is a matter for the Regulator; the Regulator has been given those and a considerable amount of resources with which to police them. It will be a difficult job-I entirely agree with you-and there will be issues for the Regulator to handle. NEST has not been set up as a policeman. We are a service provider. Regarding the expectation of a schedule arriving, as Tim has said, we will do as much as we can to make it easy for the employer, to remind them and so on. But if they decide not to pay it, it is a matter for the Regulator.

Q260 Chair: But the warnings will all be electronic-they will all be through e-mail. People will not get a red letter saying, "You haven’t paid."

Tim Jones: That is right. They will be electronic.

Q261 Chair: But you might have the red print on it, saying, "This is a warning."

Tim Jones: It may well have red print. If red print researches well, I’d be surprised if it didn’t.

Q262 Chair: It’s just that I’ve had a number of companies that didn’t realise that changes in HMRC’s6 rules meant that even payments that are one day late incur huge penalties-I know that they don’t incur penalties with you-and six months later, they actually discover that they have been walloped with this because they didn’t get sufficient warning, or the warnings weren’t clear enough. Your warnings will be clear?

Tim Jones: Our warnings will be clear. Again, we will work with employers. We’ve already had feedback about exactly this topic from employers working with us. An employer had nominated an independent financial adviser (IFA) to submit contributions on their behalf, and the IFA said, "Can you please think about sending us more e-mails, because we forgot?" It’s an important area. Our philosophy will be clear: timely electronic notification before the thing is due, and then after it’s due, if it’s late.

Q263 Stephen Lloyd: When NEST is a chosen provider, what information and help will employees receive from you or other sources in deciding whether to opt-out or save more? I know that we’ve talked a little bit around saving more than the 8%. But in a nutshell what information will employees receive from you?

Tim Jones: We are in the final stages of designing our automatic enrolment opt-out process. You may ask me, "Why haven’t you done that already?" To have launched it already would be illegal, which would be a pretty good reason for us not to have done it. Like all other providers, we can’t offer this service until the provisions of the Pensions Act 2008 come into force next year.

We are in the final stages of designing it, and we are very carefully stepping through-again, this is researched-what is the best way of presenting this. Our philosophy is to present it electronically, and it will be available on our website and through an interactive voice-response telephone channel; they are both electronic.

We are going to step people through the implications of opting out, and we may well be saying to them, "Why don’t you stay in for a bit? You can always cease contributing later." We may also be saying to them, "Are you aware that you are leaving money on the table-employer contribution and tax relief from the Government? Are you sure you want to proceed?" The research says that people welcome those realities being placed in front of them, but at the same time, if they’ve made the decision that they’re going to opt-out, they don’t want to feel obstructed in that. It’s about striking the balance between laying out the implications of opting out and not trying to change their desired behaviour.

Q264 Stephen Lloyd: That’s a very interesting point. I know that Pensions Week flagged up that NEST would be in breach of the Pensions Regulator’s rules if it allowed members to opt-out by telephone. Is that correct? If so, would it not then be counter-intuitive to what you have just said, and would it be too easy to opt-out? How do you square that?

Tim Jones: We are very confident that our design, our solutions, will be fully compliant. As I said, they are in the final stages of design, so they’re not complete yet. Nobody knows exactly what they are-not even us-so it is a little presumptuous to say that they are <?oasys [pc10p0] ?>not in compliance. We clearly would not issue any process that was not compliant. We are very confident that it is compliant. In terms of the way we are setting it out, people should not confuse the word "telephone" with "too easy", because we are using the web and the telephone. There are two different channels to set out the same carefully researched conversation-to say to people, "Okay, you wish to opt-out and you’ve gone down this route. Let us now put in front of you the implications of what you’re doing and balance that with not unreasonably trying to change your desired action."

Q265 Stephen Lloyd: Finally, we have a grand strategic question. I know all of you or certainly two of you have been involved in the pensions industry for many years, and all three of you in investment. How can the UK pensions industry improve the way it communicates with the public to help rebuild trust in retirement saving? I would add that the very group that NEST and auto-enrolment are working towards, which I think is fantastic, is the hard-to-reach group. Despite all the effort that you have been putting in for the last year and a half or so, if not longer, to get this off the ground, do you still think there are other silver bullets around communication that you or the industry can use to help to make a difference for that challenging group, for want of a better word?

Lawrence Churchill: It is a great question. No matter how much has been done so far, there is much more still to be done. I think the basis of trust is honesty and transparency. It is about both managing expectations and not letting people down. It is about telling the truth to people about the prospects for their retirement age, quality of life and so on. We have a long way to go on that. The history of the last few decades is littered with examples of where people have been misled or let down. That is still very much in people’s memories, and it is not surprising that the level of trust is very low. We have to rebuild that, and NEST is being given a great opportunity to play a part in rebuilding public trust. Through the initiatives that we have taken, such as our communications approach, a simple language, the default fund construction and so on, we are trying to get this across to people. The reality of the 8% question and so on will have to be brought forward. There has to be an adult-to-adult conversation with people about the realities of the future for their retirement years. We have a long way to go.

I am a huge fan of communications technology, and that is certainly also the case with younger people. Like many older parents, if I have a problem with my computer, I ask my 11-year-old daughter how to fix it. It is a different generation. The power of smartphones, which Tim has mentioned, is, even at their current stage of development, enormous, so he is working on our apps and that sort of thing as we speak. Who knows what sort of applications you will be able to download on to your smartphone in the future?

Q266 Stephen Lloyd: Building on the previous point about values, I’m glad you appreciate and recognise <?oasys [pc10p0] ?>something I think is very significant, which is that this has been a shambles for years. The lack of trust out there is just grotesque. The responsibility and role of NEST is to be safe, truthful and bland with our money. It potentially has an incredibly significant role in transforming the trust that people have in pensions. Do you appreciate that that is a responsibility, whether you like it or not, that NEST has?

Lawrence Churchill: We absolutely do, and the trustees welcome it. We are accountable. We have a fiduciary duty, a direct line of sight, to our members’ interests. In every decision that we take, we must take that into account, and we must explain, when held to account, exactly what balance was taken, what the arguments were and why we came to do what we did. It is something that we very much welcome. It will be a heavy burden and we will occasionally get things wrong, I am sure, but humility and asking for forgiveness when you do get something wrong is a much better approach than pretending it was someone else’s fault or that it never went wrong anyway.

Tim Jones: The pensions industry has an extra duty on it because this is a low-interest product within a low-interest product area, pensions within financial services, and that creates information asymmetry-more jargon-or consumers not knowing much about this thing. Therefore, if you do not behave ethically, you can exploit that information asymmetry by creating charging opportunities, in a sense when the consumer is not looking. To rebuild trust, what we have to do as an industry is to recognise that information asymmetry and to recognise that we must not exploit it. That provides us with a higher duty of care compared with a product area where the consumer is more engaged.

Q267 Harriett Baldwin: My question is linked to trust, but how important is it that the Government take measures to end the pension credit means-testing to make it completely justifiable for everyone to save in NEST?

Lawrence Churchill: We think it is a great simplification of a system that is very poorly understood. Arguably, the UK state pension system is one of the most complex in the world. I was reading an article by Professor Nick Barr from the London School of Economics recently in which he explained the nature of pensions systems in other countries. When he came to the UK he said, "Well, I don’t understand it, and I wouldn’t recommend anyone else to try." When authorities like Nick Barr are in that position, there is literally no hope for any of us. It is a magnificent step forward that the Minister is currently bringing before Parliament, to try to draw a line at an appropriate point and make everything simple, so that the fear of the trap of means-testing and so on does <?oasys [cn ?>not distract from people’s consideration of how to optimise their own interests. We very strongly welcome that.

Tim Jones: As a communications person, I would just say that a simple tier 1-let us say £150 a week-provides a communications platform that I can work with. Do you want to live on 150 quid a week? Probably not, so "Let us now talk about workplace pension savings", or "What else are you going to do to augment that?" As a pillar 2 person in workplace pensions, a simple pillar 1 is a great communications foundation for a conversation about adequacy.

Q268 Chair: We will be asking the Minister about that as well. May I pick up on something I think you said, Tim, but I might have got the wrong end of the stick? You said of your competitors in the market, none is prepared to pick up the public service obligation. Does that by implication mean that you will always require a Government subsidy, because there will always be a part of the market that is not viable for anyone else to pick up?

Tim Jones: We do not believe so, and our model says that we will be fully self-funding beyond the repayment of the loan. In effect, what will be happening is that the membership of NEST will be absorbing the cost of the public service obligation, but the modelling shows that, on the scale that we anticipate, that will be possible. It is for others to judge whether that is right, but that is the political settlement. After the repayment of the loan, NEST is self-funding, and the members of NEST are therefore, inside its economics, funding the cost of that public service obligation.

Q269 Chair: With the restrictions that you have, plus the PSO as well, a number of our witnesses have said that you are at the race but that you are hobbled before you even begin. Do you feel hobbled in all of this?

Tim Jones: I do feel slightly hobbled. It is interesting to see NOW: Pensions, with its history as a governmental initiative from Denmark, now fully funded, coming in and saying, "Look here, we’re here, a new player, and we haven’t got these restrictions." As the person charged essentially with being the product champion of NEST, that is an interesting place to be.

As I said, I think that the restrictions have had a significant benefit in making us absolutely focus on people who earn up to £35,000, not on anyone else, and creating a product focused on that market. The issue is whether the continuation of them is now playing out for net benefit or net detriment.

Chair: Thank you very much for coming along this morning. Your evidence will be very useful to us when we come to write our report.