Automatic enrolment in workplace pensions and the National Employment Savings Trust (NEST)

Written evidence submitted by Dean Wetton Advisory (NEST 19)

This response covers the following issues:

· Likely impact of auto-enrolment on business, especially small and micro-businesses

· Role of The Pensions Regulator, including in certification of schemes

· NEST’s potential market share and the possible effects on other providers

· Whether auto-enrolment is likely to attract new providers and encourage new models of provision

· NEST’s investment strategy

Summary

1. As NEST is ultimately funded by the taxpayer we believe it will have an unfair advantage in terms of implicit Government guarantee to cover operational risks and possibly even investment risk. We propose a system of similar implicit guarantee for pension funds that meet very high governance standards. This will improve the competitive environment and therefore choices available for smaller businesses with less resource to evaluate competing solutions for auto-enrolment.

2. DWA (Dean Wetton Advisory) was founded to provide conviction-led proactive investment advice to small and large clients. Our primary focus is on Defined Contribution Pension Plans, which we believe are the future of pensions, and we offer these underlying members access to large scale solutions by working with large providers to scale down solutions. Prior to founding DWA, Dean Wetton was Head of the Manager Evaluation Function at P-Solve, the investment consulting arm of the Punter-Southall Group. Before joining P-Solve, Dean was a senior member of Hewitt's Manager Research Team, leading the Hewitt global practice in usage and development of third party risk models.

3. DWA have in place and already operational a competitor to NEST, Pensions Umbrella Trust (PUT). We believe it is as robust from both an investment point of view and from a scheme governance point of view and it is probably cheaper (although the way NEST has priced itself makes direct comparisons difficult). PUT is aimed at smaller employers and is easy to join. It is designed to be a cooperative of employers when there are enough employers to make it self-sufficient. See Further Notes on PUT at paragraph 12.

4. We also have another two defined contribution master trust clients that we advise on investment issues that could be regarded as competitors to NEST.

5. We note that these organisations will be competing with NEST which has been funded by the taxpayer by a £120m loan (at 31 Mar 2011, NEST 2011 Annual Report) which will peak at £665.7m in March 2019 (DWP – NEST Loan agreement 11 November 2010). The loan interest rate has not been disclosed.

6. In addition we think that in employers’ and members’ minds there could well be an expectation that NEST will be backed by the Government. For example,

a) even if NEST is unable to repay the loan, the Government is unlikely to foreclose NEST.

b) if an operational error occurs, it will be rectified by NEST

c) if fraud occurs it will be made good by NEST (backed by the Government)

d) there may even be an expectation that if investment performance is extremely poor it may be augmented by a subsidy.

7. We believe that small businesses who have little resource to devote to a full evaluation of the options for auto-enrolment will therefore see NEST as the only low risk option.

8. We would like a level playing field in term of implicit Government guarantees. We think that the high standards of governance we have in place should provide sufficient confidence in the product and our suggestion is that if other schemes meet a high standard, as determined by the Pensions Regulator or other body then this certification could carry a similar guarantee as the one enjoyed by NEST. The NAPF (National Association of Pension Funds) already has a certification scheme which may be able to be used directly or with little modification (www.pensionsqualitymark.org.uk). The PQM (Pensions Quality Mark) rates defined contribution schemes in terms of contribution rates, governance and communications.

9. This would help level the playing field and give smaller businesses without the resource to conduct fullest due diligence the opportunity to use alternative providers with confidence.

10. This may result in a knock on effect if NEST deflects small funds away from embryonic master trusts and inhibits them achieving the scale that NEST is guaranteed.  It will lay open the path for tied insurance company master trusts which are simply distribution channels for their investment products and offer no better a level of governance than contract based schemes tied to an investment platform. This will ultimately supress competition and reduce choice available for consumers.

11. We would be happy to meet with your Committee either formally or informally to offer any further insights if you would find this useful.

Notes on Pensions Umbrella Trust

12. Pensions Umbrella Trust is a multi employer master trust which has only defined contribution members and no guarantees. It therefore cannot have a deficit by definition. The scheme uses independent providers, carefully sourced for all activities, including the trustees. Within the scheme these are all accountable to the trustees and can be replaced should they not perform to requirements and the trustees are accountable to an elected Governance Committee and can be replaced should the need arise. As the Governance Committee is elected by the employers it effectively makes it a cooperative of employers.

13. Its investment philosophy, similar to NEST, is to allow choice for those that want it and choose for those that don’t. PUT actively manages what it believes to be the best default and allows governed choices for those who want it. This contrasts to the market norm which is to offer choice and assist members to make those difficult choices. It is however different in the level of risk it targets for members over their life in that it will take slightly more in order to achieve higher returns. It offers a more diversified Sharia fund lifestyle offering. PUT is operational and holds members funds.

Prepared 12th September 2011