The pernicious effect of NEST’s market distortion

nest offset

Yesterday I wrote about the unsatisfactory outcome of an industry discussion with NEST. The PLSA debate on mastertrusts at their annual conference failed to properly engage with NEST’s ongoing role in the UK pensions market and the ambiguity of its status either as an Non Governmental Organisation or as a competitive market participant.

It is hard to think of similar ambiguities. Even where Government holds golden keys as in BP, the privatisation process has broken state monopolies and ensured shareholders rather than tax-payers take risk and reward from the party. But NEST has no shareholders and the taxpayer is a bondholder, being paid virtually nothing for its money and with every prospect that its loan will be written off, whether NEST is successful or not.

Could NEST be privatised?

In a thread generated from yesterday’s blog on the Pension PlayPen linked in group, David Harris asks a key question;

Does NEST have value if privatised or is it a vehicle for ‘social good’ through expansion and research ?

Clearly Damian Stancombe of Barnett Waddingham regards NEST’s debt as money well spent

we need to create urgently a meaningful, well governed and collective saving vehicle …that supports all types of infrastructure build from houses , roads to world class education in the UK ..This is to me can be NEST through either a sovereign wealth type fund/ safe harbour for employers. Write off the debt and lets create a legacy to be proud of.

This is very like the vision for auto-enrolled savings put forward by Nigel Wilson of L&G and is in line with the original vision for NEST at its conception. It pre-supposes that this cannot be achieved within the private sector.

Tony Filbin who now chairs independent trustee firm Capital Cranfield , is not so convinced.

Quite apart from it being illegal under EU law it would encourage the wrong type of behaviour (who cares how much is spent when someone else is paying).I am in favour of an expanded role for NEST incorporating decumulation but they and their partners (TCS in particular) should do this on a commercial basis with real accountability for spend.

It is one of the ironies of NEST’s infrastructure, that a large amount of its work and the destination of much of the debt is to TATA – the Indian conglomerate (that incidentally is else wise in the news today for losing its chairman and is majorly in the pension news for its management of its steel subsidiary’s pension debts.

No-one would call into question this relationship were NEST not being promoted as critical to UK infrastructure.Outsourcing is not a problem so long as NEST is perceived as an operational entity transacting within constrictions, it becomes a problem when NEST is promoted as a sovereign wealth fund.

Ironically NEST’s debt is of an order to Tata’s and BHS’ pension deficits. I don’t see these debts being written off against the public purse or member’s pensions.

What a mess!

There are many other contributors on an excellent discussion , including a former shadow pension minister (who is ironically now working for a firm competing for NEST contracts and competing with NEST for long term savings.

The picture is – as one senior correspondent put it to me – confusing!

With the exception of Beveridge, the Barbara Castle reforms and the Turner report, I regard most of the rest of UK pensions policy as a mess –

Is this NEST’s fault?

HElen dean nest

NEST CEO – Helen Dean

The NEST operational leadership team headed by Helen Dean are great, the NEST governance board are great, NEST is doing a great job for SMEs and supports it as a good choice for most employers.

NEST is in itself a great pension scheme. But it is doing damage to the future of Britain’s long term savings because it is confusing. This is not NEST’s fault. There are clear bias’ from both the DWP (whose head of private pension strategy has told us “no one could be criticised for choosing NEST” ) and the Pensions Regulator that continues to circulate mail shots at our expense promoting NEST over choice.

The implication for policy of choice is equivocal. On the one hand we have the “freedom and choice” agenda promoting active engagement and on the other the “nudge brigade” promoting passivity.  The difficulty with passive choice by employers and their business advisers is that they are making choices on behalf of people who are not only passive but powerless. If your employer chooses NEST, you get what you are given. If your employer chooses NEST without thinking of the consequences, your money is being invested without thought. If you get an unsatisfactory outcome, who are you likely to blame?

The DWP and tPR can speak for Government Regulations but they cannot speak for the civil courts. The class actions we see today against the banks and insurers were not brought by Government and Government is powerless to intervene in issues such as PPI.

In my view, the behaviour of the DWP and tPR in promoting NEST over choice is reckless and destructive. It corrodes the good behaviours among employers we are trying to encourage and it shows a reckless disregard to the infrastructure of providers (other than NEST) who are making auto-enrolment a success.

Why so little noise?

Sometimes I think this blog is a one man protest group. There are very few people (including the CEOs of Peoples and NOW) who will openly argue against the recklessness of the DWP and the corrosive impact of NEST’s £600m loan from the DWP. Is this because most of the market participants are dependent on the grace and favour of the DWP to continue trading? Or is it because no-one can quite believe this state of affairs is going to last?

I am convinced that NEST is creating big problems in the auto-enrolment market through its financial muscle. I can cite two examples

  1. operational– the NEST API is now implemented in the majority of payroll software packages meaning that NEST is easier to use than most of its rivals in most cases.
  2. marketing– NEST is free to use unlike most of its rivals

But this has happened, not because of any vision – all the other participants have had the same idea, but because NEST has bullied its way to the front of every queue.


How has NEST achieved operational supremacy?

When the industry was trying (belatedly) to create the common data standard to create a universal means of transferring data between payroll and provider, NEST did not join in. Infact NEST scuppered PAPDIS because it wanted its own protocol and was unwilling to share its work with the rest of the market. Far from being Damian’s vision of a “Force for Good”, NEST split the market -leaving those without its clout to flounder.

The operational hegemony that NEST has established for itself has been bought and not earned. It has been achieved at the expense of other providers and suppliers of service. Those providers and suppliers have every right to argue that NEST has abused its position.


How has NEST achieved marketing supremacy?

Quite apart from its huge marketing budget that sees NEST at every event with fully manned stands, NEST has bought its way to the front of the queue by maintaining its free to use pricing structure. This infuriates other providers who are being asked to submit business plans to the FCA and tPR showing they are commercially viable.

NEST’s pricing policy is destroying choice as Graham Peacock of Salvus points out on the Pension PlayPen thread.

Nest has become a market disruptor by insisting on charging members and NOT the employer. All of the other major mastertrusts have realised that in order to be viable employers need to foot the bill. Otto the only way I can see that the tax payer (DWP) will get its money back without penalising members is by charging a fair price…to Employers!

NEST puts it about that changes to its pricing need to be achieved by changes of statute, this is not the case, NEST’s Terms and Conditions allow it to charge employers for the services it provides them. So why doesn’t it.

Why doesn’t NEST recover the cost of its API from employers?

Why doesn’t NEST recover the cost of its Marketing from employers?

Why doesn’t NEST recover the costs of its central London offices from employers?

Why doesn’t NEST recover the costs of its otiose mangement structure from employers?

Why doesn’t NEST recover the £500m odd drawn down the DWP loan from employers?

No noise please -politicians at work big-fish3

The answer is , I fear, political. The Government is terrified of removing the cross subsidy that NEST is providing from the tax-payer to auto-enrolment and NEST is the back-door through which the cross-subsidy is delivered.

But auto-enrolment does not need that cross-subsidy. There is plenty of choice in the market (and the means to make informed choices too). There are great alternatives to the NEST API for  payroll software suppliers  in pensionsync , eAsE and other technology solutions.

We have now reached a tipping point where the politicians need to make a choice

Either they let NEST carry on as it is, a great whale hoovering up small employers as if they were krill.

Or we look to the future and create an auto-enrolment eco-system which continues to offer choice and the means to make those choices effectively. The system needs “nudge” to get going, but it needs engagement to be sustainable. NEST does not encourage engagement, it is the ultimate default.

It suppresses choice by jumping to the front of every queue so that small employers cannot see who else is there.

It suppresses innovation by driving out the value in the market to allow firms like pensionsync to build alternative infrastructure.

It creates an erroneous and pernicious impression that workplace pensions could be and should be free for employers to use. It has simply converted the member subsidy into at tax-payers subsidey.

Most worryingly of all, it delivers to the market a vision that is quite contrarian and does so as if this is what the market demands. The inept conception, implementation and impending  dismantlement of the NEST default strategy demonstrates that even with all its money, NEST could not get the simple thing right. It’s insistence on suppressing volatility for young people flies in the face of all experience of DC in the UK and abroad.

The NEST default investment strategy was another political mistake

The NEST default strategy may have been well intentioned but it has not delivered. It was supposed to become the new normal but no-one has followed NEST down this route.

When we are able to analyse its impact, I suspect that we will see just how detrimental it has proven to young savers and there is absolutely no evidence that NEST has seen lower opt-outs because of it. What is even worse, the NEST defaulters, who number over 99% of NEST members – know nothing of all this.

That this act of supreme folly was allowed , was as a result of NEST not being subject to the same scrutiny as purely commercial enterprises. This stupid strategy would never have been given the light of day outside of the wall garden in which NEST’s investment team lives.

The pernicious effect of NEST’s market distortion

NEST has been allowed to have its cake, eat it and spit the nuts out in its rivals faces. It has and is destroying value both in and outside its purlieu. It is eating up taxpayers money and using it to push in at the front of the queue. It has been doing the same behind the scenes.

Now NEST wants to expand the scope of its activities, effectively trading its way out of insolvency. This should not be allowed to happen till it has put its house in order and demonstrated it can repay its debt to society (tax-payer).

I want the Pensions Regulator to ask NEST for its business plan to balance its books and to publish that business plan. I want that business plan to show how it will repay the debt and by when and I want it to be as credible as any other business plan submitted to tPR as a result of the requirements of the Pensions Bill.

Nothing less will do!


Otto – show us your recovery plan!


About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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2 Responses to The pernicious effect of NEST’s market distortion

  1. Hi Henry
    Just wanted to clarify that the purpose of the debate at the PLSA was not to solely discuss the role of NEST but tackle the future of automatic enrolment – which is a meaty topic.
    As event chair, I wish we had more time to debate Nest but we didn’t.
    Great to see that you are continuing the discussion.

  2. Peter Walker says:

    Great article Henry – and I suspect that many others agree but will keep their heads below the parapet for commercial reasons.
    One question not yet asked is how NEST will fare against the financial tests in the new Pensions Bill. If I recall its borrowing is capped by Treasury and appears set to be cash-negative for some time so can it be judged financially sustainable?
    A second question builds on your arguments. Is NEST capable of challenge by the Competition and Markets Authority or under EC competition rules?
    As a taxpayer I would not wish to allow expansion of NEST into areas already well-served by the market unless these questions were resolved. As an alternative path I suggest that there are at least two roles for NEST to support that are not well-served. Others may wish to add to the list. They are:
    i) taking on small orphaned pension pots too small to be commercially viable given the TPR levy; and
    ii) taking on the small master trusts and sub-scale DC schemes that will fail to find new sponsors in the market – in order to protect members’ interests
    I look forward to the continuing discussion

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