NEST’s dirty laundry on the line!

The NEST Debt mountain

Thanks to First Actuarial for producing this chart for this blog.

Here’s how to read

In 2010 when NEST opened , it had no assets – it had quite a lot of debt (£134m* from setting up days as PADA) so lets assume it started life two years before with PADA.

By March 2017 its debt had increased to £539m (with assets of around £1.6bn – the first time reported assets exceeded debt).

Sometime around the end of 2017 NEST will break through the £600m 10 year loan offered by the DWP and will be into bigger loan territory.

Around 2026, NEST’s debt will peak at a whopping £1,218,000,000. That is how much money it will have to recoup from its customers before it can reduce its charges.

By 2026, NEST will have assets that NEST estimate as in a range with assets growing to £12-17bn by 2020 and £50-60bn by 2026.

Contributions are expected to be in the region of £4-5bn a year by 2020, rising to £6-7bn a year by 2026.

Over the next 12 years NEST will reduce the debt by £100m a year from 0.3% of its assets and from 1.8% of its contributions.

By 2038 it will be debt free, ten years earlier than the last projected date when this might happen (2048)

After 2038 (28 years into its operation) NEST will be able to reduce its charges to members.

Clearly there is a high degree of dependency on these figures on the growth of contributions and assets. 0.3% of £1bn is £3m. At £60bn you have total revenue to repay debt of £180m pa (from a 0.3% charge). With£7bn in contributions have total revenue with which to clear debt of £126m pa with a 1.8% charge. I am taking figures at the top of the range of estimates.

Assuming NEST have fixed overheads (and that means its fund managers are not getting a percentage of the fund (ad valorem) then the bulk of the revenue will be available for debt repayment as we move towards 2038.

The acceleration of debt repayment is very much back end loaded towards 2038 at which point NEST’s assets will need to be an awful lot bigger for NEST to be debt free.

This is possible but the potential for NEST’s assets to be up less than 25% of the most optimistic numbers, suggests that 2026 and 2038 are moveable feasts!

Is this value for money?

The tax payer subsidy for NEST is the loan – Robert Devereux, senior civil servant at the DWP has written to the Public Accounts Committee making the subsidy clear

nest grant

What’s important to note is that while the loan is subsidised, the principal and interest are repaid by policyholders. The NEST charging structure is not expected to change for the first 28 years of NEST’s trading.

So the debt and its interest are matters for NEST’s members (and the participating employers who put them into NEST).

2048 is NEST’s backstop, the latest promised date at which the loan can be repaid (40 years after the setting up of PADA). There is a very real possibility, if assets do not grow as expected that some people will be saving for a lifetime in NEST and always repaying the “initial cost” of NEST.

Will this have been value for money? I think that there will be considerable pressure on the fees of commercial providers competing with NEST and that NEST- stuck with its 2010 fee structure will have to fight hard to justify its charges.

Along with some flannel about 5 star Defaqto ratings, NEST make the case for these charges in a note sent out with the latest projections.

We’ve also published some data (available on the NEST website) setting out some key facts about our members which shows we are playing the role intended for us.

It’s true, NEST have been dumped the worst schemes in the market, the schemes that other providers are happy not to have on their books and schemes that only a truly low-cost provider (which NEST operationally is) could manage.

Infact, while asset and contributions are relatively small, NEST is very good value for money. It charges employers nothing for the loss-making service it has provided for 7 years and will be providing over the next 9. Members are getting great investment returns which we see as sustainable. Provided you are prepared to deal on NEST’s terms , NEST’s customer service works well.

The question is not so much VFM today but of VFM – relative to its competition in the period after 2026. That NEST has not defrayed its costs till then by charging employers set up fees (as most of its rivals have) may seriously compromises VFM for members as NEST matures.

NEST still on track – (just about).

As an insurer of last resort for the auto-enrolment, Government will be pleased that NEST is still able to conjure a financial case for its staying within its financial boundaries.

These financial boundaries were set out in the the State Aid case presented to the European Union by William Hague in 2010.

There is much in this document to look back on , not least an estimate that the cost of selling a personal pension (then) was £800.

NEST justification by Hague

The majority of the document is a justification for the Government subsidising NEST (against the rules of the EU). The critical table to which the DWP and NEST refer is this one. NEST costs

Although NEST do not explicitly say this, I suspect that they are in low volume low cost territory. Volumes (eg contributions and assets) are lower because of the push back in staging time tables and higher levels of competition than expected. Costs are lower because NEST really has got its act together as a digital operator.

The EU State Aid case is summed up by this one statement early in the document

NEST scale

There is nothing within the documents I have seen, that suggests that Robert Devereux is being devious. We are dealing here with a great deal of debt created by an organisation that has got its costs under control and is currently operating very well.

However, NEST has a debt overhang which is considerably bigger than its rivals and it has no way of recovering that debt – other than from its members. In the very long term (post 2038-2048) I can see scope for NEST to reduce those charges but I see no scope before then. NEST will start looking uncompetitive from the mid 2020s and employers who have young workforces, should be thinking about the implications in 20 or 30 years time.

While I’m pleased that NEST has got its dirty washing out , it’s still an unpleasant sight and carries a slightly unpleasant smell!