Adam Cadle speaks to Nest’s chief executive Tim Jones about the progress of the workplace pension scheme since its launch in 2011

How would you sum up the scheme’s progress in the auto-enrolment market?
I am very pleased with our progress and the reason that I am is that I have spent most of my career involved with major corporates and they typically don’t buy brand new services. This hasn’t been the case with Nest however. The reason we launched Nest in 2011 was to ensure that we had a year of live operation under our belts before any of the major corporates in the earlier stages came to use us. It was great to be able to go to them as they came to us in the latter part of 2011 or early part of 2012 and be able to say we are live already. That was a powerful message. To have corporations like McDonalds, BBC and Compass using Nest is very heartening that we have built something that they feel able to trust enough to use with their workers. Obviously we feel a big sense of duty to do a job for them as they have trusted us as a relatively new player. We do now have over 100,000 members but we already have a few hundred employers live so Nest is going through an interesting journey. At the end of 2012 we had 2,000 members and we will have near to half a million at the end of 2013 and will be well on the way to a million at the end of 2014. It is a very dramatic ramp up of the business and it is happening better than I hoped it would. In Tata Consultancy Services (TCS) we have one of the world’s leading information systems for corporations employing around a quarter of a million people. They provide all the individualised accounts and Nest designs the scheme and the investment strategy. We are proud of our investment strategy and it is not conservative as some people say. In addition we are out for real estate mandates including both a direct mandate and a Reit. We are now getting ready for the future and we cannot say no to firms who want to use us by law, so that is a challenge.

When you announced your arrival in the pensions market, did you expect schemes such as NOW: Pensions to enter the market so soon after, thus challenging Nest’s proposition?
The surprise was that there weren’t more of these. The government’s automatic-enrolment programme massively increases the size of the market for workplace pensions and it turns a sold product into a bought product so employers have to have one. By turning a sold market into a bought market you significantly reduce marketing costs so that combination makes the UK workplace pensions market more attractive than it was to private players. I expected to see three, four or five new entrants. Our job is to sit alongside all of the private providers in the market, and work with many of them.

How much of a hindrance have the Nest restrictions on annual contributions been?
This was part of a political consensus in 2005/06 and this was designed to make Nest focus on its target market - and we have. Although the restrictions don’t prevent employers from fulfilling their regulatory obligations with Nest, some employers and employees want to do more than that. With capacity constraints emerging in the private sector, these employers and employees are frustrated by the restrictions on Nest. Through the lens of a Nest member they are saying “hang on we are paying for this pension scheme but ours is limited? Why does this make sense?” It is the same with transfers into Nest – if you are a member why can you not put a bequest in of £10,000. There are lots of people who are coming into automatic enrolment in their 40s or 50s who have very little private pension saving but a number of them are receiving bequests from relatives that die but are not able to put a £10,000 or £20,000 legacy into Nest like any other pension schemes as a result of the restrictions. It is a matter for the government to decide what to do.

How many employers have decided to use Nest alongside an existing scheme? Is this becoming the norm?
There are a number using Nest at the employer duty minimum, alongside a scheme that might have been there before where they are paying in more. We have other customers who are using Nest for workers who have already taken their pension at work but they are still working. We have got a number of public sector employers using us, national health trusts and universities who will not necessarily replace their existing provision but these are complicated organisations and they will find a pocket of staff that don’t quite fit their existing scheme policy and they will decide to use Nest. We have to say yes to them.

Are the investment strategies of Nest concrete or are you adapting them all the time?
The way that the investment strategy works is that it changes all the time. It’s a target date fund structure. The team has a set of underlying mandates and they can mix them together to create the volatility and risk budgets they think are appropriate to try and hit the investment objective. We gather the mandates together into two composites – a return seeking composite and an income seeking composite – the diversified growth mandate and the equities mandate would be in the return seeking side and gilts, index linked gilts and corporate bonds would be in the income seeking side. These are blended together to tune it into the level of risk budget for that stage of the persons journey. We moved back into equities in the autumn of 2012. It is a dynamically managed investment strategy and has a very clear investment objective in the growth phase of CPI +3 per cent and as we run more money, we will add more mandates.

Transparency with regards to pension charges has been a widely debated topic in the pensions industry over the last six months. Nest offers all-in one charges to members by law. How has this been received by your customers?
Nest costs 30 basis points plus 1.8 per cent on contributions which equates to around 50 basis points. This has been well received by customers. The fact that we have a single price is one of the things that keeps us focused on our target market.

With the Muslim population set to increase in the UK, the fastest group in the decade since 2001, how does Nest’s Sharia fund operate to accommodate the investment needs of this group?
At the moment the fund has one mandate, HSBC Global Islamic Titans. We aspire to add more mandates to it. For us as we build scale we will look to make the Sharia fund a more sophisticated offer, same with the ethical fund.

What do you see as the main challenges facing Nest throughout 2013?
The hardest challenge that we face going forward is engagement. Opt-out rates do increase with age but I don’t think that is rational or sensible for many people. The reality of working lives these days is that if you are 55 you are probably going to work at least another 15 years until you are 70. Working gives you a role in society. If you stay in at least until state pension age you will get an employer contribution and government tax relief.

Adam Cadle is Senior Reporter, Pensions Age

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