NEST is not a financial soup-kitchen.

Soup kitchen

For some time , I and others advising on workplace pensions have been calling for NEST to make a clear statement on charging employers for NEST support. Now we have it . In case you can’t press the link , here it is in full.

NEST has no plans to introduce an employer charge

Helen Dean, chief executive of NEST, says:

‘Our legal obligation to be open to everyone has always been a critical part of the auto enrolment programme. That’s why we think it’s right that NEST should not introduce an employer charge. Imposing a charge simply doesn’t fit with our public service obligation; particularly as it would negatively impact smaller employers the most, creating a barrier to entry and creating extra costs that many simply wouldn’t be able to afford.’

I will take issue with this short, defiant statement in several ways. But first let me lay out the facts as I understand them.

  1. NEST’s public service obligation is to take any employer staging auto-enrolment. It does not take any employer, for- to qualify for NEST you must pay from a UK bank account – many offshore employers (mostly staging next year) do not use UK bank accounts (for tax reasons). NEST will not take money through an offshore bank account for money-laundering reasons. So the public service obligation(PSO) is relative.
  2. Since the PSO is relative, it is open to marketing spin and that’s what we are getting here. NEST implies that it should be free to use indefinitely but it clearly isn’t. Even using the NEST API , as one can do with Sage and will be able to do with other payroll software (currently in beta testing) , employers have to put aside money to use NEST. Either they pay for middleware, or purchase an extension of their existing software license of muddle through on their own (incurring internal management time). In any event auto-enrolment is not free.
  3. NEST’s two principal rivals as master trusts, NOW and People’s Pension, both charge employers for the support they offer, in different ways – but the charge is explicit, all the major insurers either have or have had similar charges. For an insurer to make a statement like NEST’s would require it to reserve against the promise. This would have a cost which would be born by shareholders or (with Royal London) other policyholders.
  4. NEST is losing money. We don’t know the burn rate but in the last published accounts it showed it was indebted to the taxpayer to the tune of c£400m. This is trading debt and can be seen as comparable to the loss of £150m which L&G accept they have taken so far on its auto-enrolment book.
  5. NEST has received a grant of £14m from the DWP for agreeing to take on any business in the land (not presumably those who are without a UK bank account). This is to cover the PSO.
  6. NEST’s PSO does not include a commitment not to charge employers. NEST cannot increase member borne charges (without a change to legislation) but it has the right to charge employers and in doing so it would not breach the terms of the grant.
  7. So the decision to declare it will not charge employers is nothing to do with the PSO, it is a marketing decision.

I am happy for NEST to respond to this logic , but to me each of the 7 statements is factually correct and the conclusion that NEST’s position is a marketing position and not part of NEST’s statutory duties should be made absolutely clear. It is not clear in the statement.

Is NEST trying to take an unfair advantage from its special status?

In my view it it. NEST still has £200m to draw down on its loan and it can continue to claim it is the last line of defence for smaller employers. But as I’ve made clear already, charging employers the market rate for support services is not breaching its covenant.

Not charging the proper rate is creating a market distortion, as I’ve written elsewhere.

Providing employers with an unsustainable promise is bad for auto-enrolment and bad for employers.

The National Audit office has made it clear that it will be scrutinising how NEST intends to pay back its public debt in its allotted timeframe.

The Public Accounts Committee has called for NEST to be open about its finances and explain how it will balance its books.

Nothing in Helen Dean’s statement can give the NAO or the Public Accounts Committee any comfort. NEST has a social purpose, but that represents £14m of its £400m+ debt, for the remainder, it has to be considered a commercial providers. It likes to tell the market it provides a comparable if not better service to its rivals and it does.

But this service comes at a cost and it is unfair on the tax-payer that it has to subsidise that cost as it is doing. It is unfair to other providers (especially the new entrants) that NEST is using public money to get a marketing advantage and squeezing the market as it is.

This is unfair to NEST itself

Most of all, the position that the current management is adopting is unfair to NEST itself. If it maintains its current position, it will be used by many intermediaries as the provider of choice for all those employers they cannot afford to advise. In short it will become the sump of the auto-enrolment engine.

It will take hundreds of thousands of employers on which have little or no engagement. Those employers will have been promised free and will expect free. By making the statement NEST did today,  NEST has created an expectation of “forever free”. This is such an albatross around NEST’s neck as to leave NEST bowed beneath its weight ad infinitum.

The cost of business take-on resulting from this irresponsible position will be immense with huge numbers of employers flocking to NEST’s door as it becomes a financial soup kitchen. This will not improve NEST’s financial position, it will accelerate its losses and force it up against its £600m credit limit.

Only when it passes a point of no return, when the NAO and PAC call NEST’s bluff, will NEST have to change tack and start charging. But by then the damage will be done.

I am deeply concerned by the financial logic of NEST’s position and many prudent intermediaries will be too. At a time when good governance and financial prudence are our catch phrases, NEST is showing poor governance and financial recklessness.

One + One does not equal Zero. NEST cannot take on cost and risk without being rewarded. The market is strong enough to share the new business strain of 2016-17 and NEST’s comments about affordability are a smokescreen.

NEST should reconsider its position immediately, withdraw this statement and replace it with a credible pricing structure for 2016 and beyond.

About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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