Nest closes Pre-retirement Fund after wide review

Created alongside Nest’s inception 10 years ago, the fund was designed “initially to help members protect their money while they considered which annuity to select”, Eve Read, the master trust’s acting director of customer engagement, told Pensions Expert.

However, the “landscape has evolved” due to the introduction of pension freedoms in 2015, she explained.

“Nest’s default funds now have an at-retirement risk profile that allows members to keep benefiting from investment returns for longer.

Pension schemes delivering auto-enrolment can’t be afraid to make changes. What was right a decade ago may not be suitable now, and realising that is part of ensuring auto-enrolment continues to be a success

Eve Read, Nest

“Members who take no action at retirement are defaulted into a more suitable post-retirement fund, depending on their pot size,” Read said.

Although the volume of annuities purchased by Nest members increased since 2015, as a proportion of overall retirement claims the figures have remained unchanged.

Annuity purchases remain less than 1 per cent of its retirement payments, the same as in 2017, a Nest spokesperson said.

While volumes have gone up, this is a function of the increasing value of Nest member pots, with more members finding themselves able to purchase an annuity, as well as growing numbers of members reaching retirement, they added.

Sonia Kataora, partner at Barnett Waddingham, noted that despite the introduction of the pension freedoms, “the ‘pre-retirement’ phase still has the same objective, namely to progressively switch members’ assets so that these start to reflect members’ likely needs in retirement”.

However, these needs “have become less obvious in the world of pension flexibility”, she said.

“There are now several destination points rather than just purchasing an annuity. Retirement is also less of a cliff-edge event with people retiring into retirement, perhaps working reduced hours having taken an initial lump sum withdrawal. 

“The pension freedoms effectively turned defined contribution pension arrangements into later life savings vehicles, rather than a retirement vehicle. This means that lifestyle decisions, and how members intend to retire, are the basis for the investment strategies in the pre-retirement phase.”

‘Pre-retirement’ concept confused members

Another reason for Nest’s decision in closing the fund was misunderstanding around its name.

While the stated objective of the fund “was to manage conversion risk with purchasing annuities”, recent research conducted by Nest showed its name “was a source of some confusion, since everyone is technically in ‘pre-retirement’ until they retire”, Read noted.

“We have found that the members choosing this fund are a mixture of younger and older savers,” she added.

“While we have a clearly labelled Lower Growth Fund for cautious savers, which members of any age can choose, we felt it prudent to limit the risk of people inadvertently choosing a very cautiously invested fund for the wrong reasons and leaving their money to depreciate over time.”

As a result, the master trust decided to close the Pre-retirement Fund and move members back into its flagship target date funds.

Kataora agrees that the term pre-retirement “is not helpful to the man or woman on the street” in understanding pensions and the myriad choices available to them.

She said: “I have sympathy in wanting to address confusion around its naming.

“Given this phase of the investment strategy is about consolidating the growth achieved during the accumulation of the savings before those savings are depleted in retirement, naming it as the ‘consolidation’ phase instead of ‘pre-retirement’ is one alternative approach.”

When the decision to close the fund was made, Nest identified 933 members who would be impacted.

The master trust wrote to them explaining “the decision and the options available to them, tailored according to where they are on their savings journey”, Read said.

If no choice is made, the members will be moved to Nest’s Retirement Date Fund. So far 32 members have chosen to move, with Nest classifying the engagement as positive.

“While most of these went to specific fund choices, eight members chose to move into the Nest Retirement Date Fund early, taking the active decision which would have happened if they hadn’t taken any action,” a spokesperson said.

Changes are needed as auto-enrolment develops

With 2021 marking Nest’s 10th anniversary, with more than 10m members enrolled, Read noted that auto-enrolment has created a new type of customer as “someone who is likely to be brand new to pension saving”.

“These savers aren’t too concerned with how pensions have operated before, but have their own expectations of what retirement saving means,” she noted.

Read explained that when the master trust made decisions a decade ago, such as around fund choices, it had to anticipate how its prospective members might behave.

“Now we have 10 years of data under our belts, and we’ve continued pressing ahead with researching our members’ attitudes, expectations and concerns. We know creating the right pension scheme will be an evolving process,” she said.

“Pension schemes delivering auto-enrolment can’t be afraid to make changes. What was right a decade ago may not be suitable now, and realising that is part of ensuring auto-enrolment continues to be a success.”

Kataora concluded: “In the world of pension flexibility, I think an approach that allows members to select appropriate strategies for different objectives at different timescales (eg, if members plan to take a series of lump sums, ‘switch on’ different levels of income at different ages and/or leave an amount for inheritance). 

“We need to make it easy for members to follow a simple process that results in a bespoke, sophisticated investment strategy that meets their needs.”