Auto-enrolmentJan 23 2019

Government pledges £329m to Nest

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Government pledges £329m to Nest

Guy Opperman, parliamentary under secretary of state for pensions & financial Inclusion, yesterday announced he would ask Parliament for another £329m associated with Nest.

This was to fund new requirements under the rules for master trust authorisation, which Nest will need to abide by.

The Pension Schemes Act 2017 introduced the definition of a 'master trust' and the introduction of a new authorisation and supervision regime.

To be able to operate in the pensions market as a master trust, schemes are required to meet five authorisation criteria, including holding a capital buffer to withstand financial difficulties.

Mr Opperman said: "One of the criteria is that the scheme must be financially sustainable and that in the event of a triggering event, an event that would put the scheme at risk of needing to wind up, the scheme must hold sufficient financial reserves to cover its gradual closure without putting these additional costs onto the scheme members.

"As Nest is currently funded through a government loan and, therefore, holds no financial reserves, The Pensions Regulator, who oversee the authorisation process, has suggested a 'Letter of Comfort' from government could provide a solution, which for government accounting purposes is described as a contingent liability."

Opperman said in the remote possibility of a triggering event occurring, government would fund Nest through to closure and meet any one-off associated closure costs.

This gave a remote contingent liability of £329m. The expected loss as calculated by the department was £16.45m, he added.

The Department for Work and Pensions would manage the governance and risk associated with the contingent liability.

Nest, the pension scheme set up to facilitate the government's auto-enrolment project, has already been given £622.7m of taxpayer money to pay for the scheme’s set up.

Nest has more than 6.4 million members and currently looks after pension schemes for about 600,000 employers.

Darren Philp, head of policy at Smart Pension, criticised the government backing, saying it would lead to a stifling of innovation and an effective market.

He said while Nest had been central to the rollout of auto enrolment, it could not be allowed to unfairly leverage its privileged position.

He said: "While the news that Nest has got out of holding capital through a government guarantee doesn’t come as a surprise, the government needs to give some serious thought about Nest’s position in the market.  

"Is it a private market participant or is it part of government?

"We’ve come a long way as an industry in recent times, but the time has now come for the government, Nest and the regulator to come clean about Nest's future role."

Tom McPhail, head of policy at Hargreaves Lansdown, also raised concern over competition in the market.

He said the authorisation regime was widely expected to lead to a consolidation in the master trust sector, with smaller schemes looking to wind up.

He said: "The good news for pension savers is the new regulatory regime is clearly no walk-over, with some schemes choosing to close down rather than attempting to comply.

"The scale of the potential liability for Nest is pretty eye-watering though, even in light of the fact they are the largest master trust in the UK.

"This news reinforces the expectation we’re going to see significant consolidation in this sector. It is also going to raise questions from some competitors regarding the scale of the subsidy provided to Nest and how this sits with state aid regulations."

According to McPhail, there are currently 90 master trusts in the market, with six schemes already wound up, and 29 schemes deciding not to apply for authorisation and winding up. He said this left 49 schemes to either apply for authorisation or trigger their exit from the market by March 31.

Dippy Singh is a freelance reporter for FTAdviser