–> This is a pre-event interview in the run-up to the Leaders in Finance Future of Pensions Event 2024 on April 11, 2024.
Jeroen Broekema: Thanks, Will Sandbrook, for taking the time to speak to Leaders in Finance in the run-up to the Leaders in Finance Future of Pensions Event 2024 on the 11th of April 2024. Could you first introduce yourself?
Will Sandbrook: Thanks for having me. My name is Will Sandbrook, and I am the Managing Director of Nest Insight. This is the public benefit research and innovation arm of the Nest pension scheme in the UK.
Jeroen Broekema: Right. For people that have never heard of Nest, what exactly is it?
Will Sandbrook: Nest is a multi-employer occupational defined contribution pension scheme and provider, with its roots in the UK’s automatic enrollment reforms. When the UK government mandated automatic enrollment across all employers, it anticipated challenges for smaller businesses and those with high staff turnover or low wages to comply using existing or commercial schemes. Thus, Nest was established by the government as a public pension provider, mandated to accept any employer seeking to utilize its services. This ensured that all employers had an option to meet their obligations under the automatic enrollment program. As a result, Nest quickly expanded to serve around 11 to 12 million members, primarily from lower-income and transient sectors of the economy, which are traditionally underserved by commercial providers.
Jeroen Broekema: That is a large number. Is it the number you are aiming for, or should it be even higher than that?
Will Sandbrook: Over time, we expect close to half of UK employes, roughly around 15 million individuals, will have a Nest account. Not all of them will be contributing continuously; they may transition between jobs where they contribute to Nest, jobs with different schemes, or periods of non-contribution. Nevertheless, we foresee a gentle growth in Nest membership in the coming years.
Jeroen Broekema: So, Nest seems to be very successful. What do you think are the key contributing factors to that?
Will Sandbrook: Yes, I believe this has been very successful so far. A big part of this success can be attributed to the government’s foresight 20 years ago in recognizing the need for a Nest, a public entity designed to ensure proper market functioning. Nest operates as a trust, prioritizing its members’ needs without pursuing profit. These needs often differ from those of traditional mass-market pension savers. I think we have been quite innovative in our investment strategy and digital platform for employer interaction, allowing us to efficiently serve a million employers. This approach has helped us to build a reputation over time, earning respect and trust from our stakeholders. This trust has enabled us to continue the growth.
Jeroen Broekema: Makes sense. At the event, we have several international speakers, with a focus on the UK, Sweden, and Denmark. Regarding the UK, what are the key developments over the last decade or any period you choose? Additionally, what are the biggest opportunities and threats for the system in the UK?
Will Sandbrook: Well, the significant moments in the UK’s pension system can be traced back to the decline of the defined benefit pension system, which was quite mature, in the 1980s and 1990s. Due to various economic factors, many employers found it unsustainable to maintain these schemes, leading to a decrease in participation in pension saving. By the late 1990s, participation in pension saving was down, a lot of people weren’t saving at all. There was a growing recognition that under-saving for retirement would pose a significant challenge for the country’s future. This realization came together with an independent Pensions Commission in the early 2000s, which thoroughly examined the situation and proposed solutions to address it. The realization that we were heading for a problem was a big moment. One of the key outcomes of this period was the introduction of auto-enrollment in 2012 and the launch of Nest. Over the subsequent years, these initiatives helped reverse the downward trend in participation rates, ultimately leading to a notable increase in pension saving across the UK.
Then, I believe the next significant development occurred in the midst of these changes, focusing on how individuals could access their retirement income. There was a shift away from compulsory annuity purchases towards providing people with more choices and flexibility in managing their funds. The implications of this shift are still unfolding, particularly in terms of product design, with room for further innovation to tailor retirement income products to individual needs. Overall, these moments represent milestones that reflect the vision set forth by the Pensions Commission in the early 2000s and the subsequent legislative actions.
As for the challenges and opportunities, one cannot overlook the remarkable increase in pension participation rates in the UK, with approximately 90% of workers now enrolled in workplace pensions compared to less than half in the private sector 15 years ago. This progress presents an opportunity to enhance the functionality of the system and ensure its continued evolution to meet the needs of participants effectively.
And then you come to the challenges, right? So, these challenges are sort of twofold or threefold. Firstly, the contribution rates at which people are auto-enrolled are often too low to achieve a benchmark income in retirement, whether it’s a two-thirds income replacement rate or a defined minimum living standard. Many individuals won’t meet these standards with the current contribution rates. Overall, people tend not to contribute more than the defaults, and these defaults remain quite entrenched in the system. Hence, there’s been considerable debate about whether the minimum contribution levels under auto-enrollment should be increased, similar to what happened in Australia, where superannuation rates started at 8% and gradually rose to 12% over time. While this may seem like an easy solution to the challenge – just incrementally raise the contributions – it highlights the other side of the coin.
At Nest, we focus extensively on the people we were established to assist – those with lower incomes, in less secure or more precarious employment. These individuals have faced economic challenges over the past 20 years since auto-enrollment was introduced, including the global financial crisis, the pandemic, and the cost-of-living crisis. For many, household finances are stretched and precarious. Simply increasing pension contributions for these individuals without considering the impact on their current standard of living isn’t straightforward.
Therefore, the next opportunity lies in reimagining the future of auto-enrollment. Rather than solely focusing on increasing pension savings, it should become more flexible and encompass broader savings goals. This could include emergency savings or short-term savings alongside pension contributions. Thus, the challenge is how to expand the system and build on the foundations of auto-enrollment in a way that acknowledges the real financial experiences of those with lower incomes, as well as those higher up the income distribution.
Jeroen Broekema: Great. Are there specific countries that Nest looks at for inspiration or for insights into practices or initiatives that you could learn from?
Will Sandbrook: Yes, I believe there tends to be a sort of community among English-speaking countries with defined contribution pension systems, such as the US, Australia, New Zealand, and Canada. These countries share some systemic similarities in how their retirement systems are structured. Particularly in the US in recent years, there has been significant discussion about incorporating emergency savings into the pension system, focusing on liquidity and access to retirement savings. Observing the developments in the US, especially innovations like the Secure Act, which allows for emergency savings within the retirement system, is of great interest to us. Similarly, both the US and New Zealand have different mechanisms for individuals to access their retirement funds, such as taking loans or using the money for specific purposes, which is now a growing topic of discussion in the UK as well. We are keen on understanding and learning from these experiences. As for my personal perspective, having collaborated with individuals from various pension systems worldwide, I find a lot to admire about many European pension systems, which are often more rooted in social solidarity and less individualistic than the UK system. However, considering the unique historical, cultural, and social context of the UK, it may be challenging to move too far in that direction. Therefore, exploring alternative approaches to achieve similar outcomes is crucial.
Jeroen Broekema: Yes. We are very much looking forward to learn more about the things that the Netherlands can learn from the UK and other countries. For my last question, what are the aspects or things you look for at events like this?
Will Sandbrook: Every system and jurisdiction is different, have different cultural and structural factors that lead to different retirement system designs. We can always learn off the other ones. I find it incredibly interesting to learn about the challenges other countries are facing and how they are addressing them. It’s like uncovering puzzle pieces that may fit into our own solution space. For instance, while I’m not an expert on the Dutch system, I understand that it’s moving towards individualization, mirroring some trends in the UK system, which is also exploring collective solutions, especially regarding retirement income. So even though both countries started out in different places, there are now intriguing parallels emerging. Overall, it’s about meeting the people grappling with these complex issues and discovering innovative solutions. So those are the things I look for, when I am lucky enough to travel to events.
Jeroen Broekema: We are very lucky that you are traveling to the Netherlands, to attend the Leaders in Finance Future of Pensions Event on April 11. Thank you, Will Sandbrook, for taking the time to talk to us. We are looking forward to having you with us.
Will Sandbrook: I am looking forward to it. Thank you!
–> This is a pre-event interview in the run-up to the Leaders in Finance Future of Pensions Event 2024 on April 11, 2024.