On the go: The government has given Nest, the workplace pension provider, a contingent liability guarantee of £329m to enable it to comply with the tough new master trust regime amid accusations of unfair state aid.
This new safety net is on top of the initial £622.7m government loan that has already been advanced to Nest to pay for the scheme’s set up.
The issue of the guarantee to Nest, which has more than 6.4m members and looks after pension schemes for over 600,000 employers, is necessary to comply with the Pension Schemes Act 2017.
This introduced a new authorisation regime for master trusts: to get authorisation, schemes must prove they have the financial resources to cover running costs and also the cost of winding up the scheme if it fails, without impacting on members.
As Nest is currently funded through a government loan and, therefore, holds no financial reserves, the Pensions Regulator, which oversees the authorisation process, has suggested a “letter of comfort” from the government could help Nest meet the new requirements.
For government accounting purposes, the letter is described as a contingent liability.
Announcing the guarantee, in a statement to the House of Commons, on January 22 Guy Opperman, minister for pensions and financial inclusion, said: “The letter confirms that, 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 gives a remote contingent liability of £329 million. The expected loss as calculated by the department is £16.45m (based on the liability multiplied by risk).”
Tom McPhail, head of policy at Hargreaves Lansdown, said: “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.”
He added: “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.”
A DWP spokesperson said: “The government’s current loan to Nest meets state aid rules, the European Commission has previously confirmed.
“The letter of comfort is not additional funding for NEST, it is an assurance from the government to enable it to meet one aspect of master trust authorisation, ensuring that it continues to fulfil its public sector obligation.”
Mark Rowlands, Nest’s director of customer experience, said: “We’re playing a crucial role in delivering auto-enrolment, accepting any and every employer who wants to enrol their workers. We have a clear plan to repay our loan and are well on track to becoming a self-financing master trust, driving improvements and innovation across the industry and helping millions of people to enjoy a better retirement.”
The Pension Schemes Act 2017’s new authorisation and regulation regime for master trusts, overseen by the regulator, is expected to lead to a consolidation in the sector, with smaller master trust schemes looking to wind up.
There are currently 90 master trusts in the market. Only six have so far applied for authorisation to the regulator.
Twenty-nine schemes have decided not to apply for authorisation and are winding up, with six schemes having already wound up. This leaves 49 schemes to either apply for authorisation or trigger their exit from the market by March 31.
