NEST expansion could bring problems home to roost
The rise of Jeremy Corbyn to the helm of the Labour Party has reopened the great divide in British politics most thought Tony Blair and David Cameron had consigned to the past.
The sacred ‘middle ground’ is beginning to clear, with Labour dramatically lurching to the Left and backing state intervention in sectors, like energy, where it believes consumers are being poorly served by competitive market forces. The same can be said of the railways, which Corbyn plans to renationalise and about which he was infamously filmed complaining while sat between two carriages.
Indeed, in a hard-left speech to the Labour Party conference last week, Shadow Chancellor John McDonnell couldn’t have been clearer: “Be certain, the next Labour government will be an interventionist government.”
And yet even the most hardened Labour Socialist wouldn’t argue for blanket intervention across sectors (I think they call that Communism).
So if Labour is pro-intervention, the Conservatives are presumably pro-market forces, right? While no Government should rule out market intervention altogether – there are times it is absolutely necessary – you would expect a right wing administration to only take such steps when it is absolutely, irrefutably necessary.
Which brings me to the National Employment Savings Trust (NEST), the pension scheme set up by the last Labour government to support automatic enrolment. Nest is an example of positive, necessary market intervention – without it auto-enrolment could have foundered, with traditional insurers unwilling to accept business deemed uneconomic. There was a clear market failure, and the state successfully stepped in to address it.
The Government is now, however, contemplating a radical expansion of NEST. In a call for evidence which closes on 5 October, the Department for Work and Pensions proposes two key changes to NEST’s remit. First, it suggests NEST should be allowed to offer drawdown services to its own members in response to the pension freedoms. This seems sensible and would smooth the transition into retirement for the millions of members who end up saving with the default provider.
Second, and more controversially, it proposes “expanding the opportunities for individuals, employers and other schemes to access Nest’s services”. If the Government follows through, it would effectively see a state-backed pension provider actively (and judging by its approach during auto-enrolment, aggressively) competing for business with private sector firms.
The drawdown market won’t fear NEST – it is already hugely competitive, with advisers and individual savers choosing providers based on a variety of factors, including cost and service. However, there are broader questions about whether the Government should be intervening in a competitive market that works well for consumers. Does society need a state-funded drawdown provider more than, say, a mortgage lender, for example? Judging by the number of schemes launched by the Government, it’s clear policymakers see failure, and yet have stopped short of entering the market.
There is also the question of how this might affect investment in the UK economy, a particularly sensitive subject in the wake of the Brexit vote. Would foreign investors be willing to plant roots on these shores if policymakers so readily intervene in well-functioning sectors?
NEST could, of course, do some good in the drawdown market. If there are pockets of the industry managing to get away with overcharging clients, the introduction of a large state-backed provider could pressure any laggards to lower charges for the benefit of consumers.
But it is incumbent on the Conservative Government to make the case for NEST’s expansion. That is, unless Prime Minister Theresa May plans to follow Corbyn and McDonnell’s economic formula of intervene first, ask questions later.