Nausicaa Delfas says in the Pensions Regulator’s 2025/6 Corporate Plan that TPR will be
“driving value for money in pensions schemes, and creating default retirement solutions for pensions savers”.
What does this mean beyond what we have received since the onset of auto-enrolment in 2012 and of the pension freedoms in 2015?
The Pension Schemes Bill is the third major advance in retirement funding; introducing the concept of innovative “DC pensions” as a default. Why do I think this a major advance? This analysis explains why I am excited.
I was interested in Nest’s way of paying pensions and the more I look into it, the more interested I get.
Let’s start at the high level and look at what Nest is planning to do; according to various statements from Paul Todd, Chief Operating Officer), Nest will pay pensions by default, offer indexation from what it can afford to pay and allow members who want out of the pension to take money back (presumably less the payments made till then).
Although annuities are used to cover extreme old age, the vast majority of most people’s retirement will see their money invested and they will get the benefit of successful long-term investment by way of pension indexation. This should deliver value for money, it’s known as conditional indexation, a partial payment to pensioners using CDC.
Paul Todd
Apart from the CDC style conditional indexation, there are two things that are conspicuous but unexplained so I’ve been putting AgeWage’s head of compliance – Phillip Persson to work. Philip was formerly in the Nest Senior Leadership Team and Head of Nest’s Financial Accounting, so a smart and experienced chap.
This is what we think are the two conspicuous innovative and good steps forward.
- Nest can offer certain pensions (invested to 85 with longevity insurance from then on) without help from employers or sponsorship through capital backing.
- The pension in payment can be stopped at any time till 85 with a capital payment paid to pensioners instead of future income if they want to have cash
Certain pensions – what’s going to be promised and how?
Nest are happy to offer a core pension in exchange for the pot built up by members. I am not aware of the details in terms of types of pension, rates of exchange or when the pension can start but we’re told that the pension will be flat and that increases will depend on there be money in the fund from which payments are paid to pay them.
While the indexation won’t put strain on funding (since it is paid according to fund performance) , the core pension is certain (I mustn’t use “guaranteed” as that is reserved for insurance promises and this is not). The promise of a pension is backed by something and what that provident capital is – we did not know.
It is critical that we know, and Philip Persson has some ideas. Here is the analysis of Nest’s P&L.
– Healthy growth in members & contributions
– Big increase in AMC – significantly more than investment and admin costs
– 2024/5 finally reached breakeven on Corp income v costs: a small surplus of £11m
– the 2025 surplus was less than interest earned on bank savings of £14.5m
– paid off £6m from the £1.2bn DWP loan
– small net positive cashflow is slowly building up significant bank balances: £311m in 2025
– interest rate on bank savings at 4.8% significantly higher than WACC on DWP loan of 3.24% (the DWP loan tranches are fixed, so can’t be paid off early)
Our view is that Nest is running a healthy cashflow of £311m to back pensions. This supposition is speculative but it is one explanation how Nest can run a DB plan without sponsorship of employers or recourse to borrowing.
What is of critical importance is that the repayments of the loan from the DWP is fixed and at a rate of interest that is lower than then interest received on the £311m.
In short , it looks like Nest are doing what it should do and offering millions of prospective pensioners – pensions.
The critical question will be the rates of conversion between the transfers in and the pensions offered. Too high and Nest will be accused of becoming the place to retire (using DWP’s loan to take over the market), paying too little will expose the default decumulator to offering lower income than a purchased annuity.
With the increases market driven, this will be an area of some discussion, especially if Nest accepts transfers from those with pots but no Nest account.
On the face of it, this is a thoroughly good development and we can see it driving a VFM war from its rivals to offer something equivalent. Of market changing capacity I am sure.
Pensions can be swapped for cash before 85
I am not clear, though I’m sure Nest are, how someone can be paid an occupational pension and retain the right to convert it back to cash (capital). I have one clue, I am grateful to LITR for this
certain employers’ defined contribution schemes (those that built up a pot of money) where a small pension is already being paid out to you. Note that the pension scheme has to be paying you the pension direct (called ‘in house’) – that is, the pot of savings has not been used to buy an annuity.
If Nest can pay “in house” pensions to all its savers then the adjective “small” may be stretched but it opens the door for other DC schemes to do the same.
Nest say that everyone can get a Nest pension by choice or by default; “everyone” that is except those capped by being 85 or older (the 85 cap).
The “85 cap” is the age in which the backing of the pension switches from investment to annuity, albeit without members taking a decision. The note above from LITR above explains that pensioners cannot get capital rather than income if being paid an annuity.
If all DC savings schemes can become DC pension schemes, compete with Nest and offer money back while a pensioner is alive, then DC pensions will become extremely popular and may become chosen pensions and not just entered into by default.
Frankly, I don’t think many pensioners will be put off by the 85 cap, by 85 – the flexibility of splurging cash is of little importance, most capital withdrawals will be to make potentially IHT transfers (and these will be few and far between for Nest pensioners).
A retirement blueprint for Nest’s members and….
The use of the provider’s covenant as Nest appear to be doing is innovative and exciting.
The development of a core pension with conditional indexation will be popular.
The capacity to offer capital back to pensioners in pension is a game winner over annuities.
10 years ago the paper below was published. Have a flick through, Nest has come on a long way.
Much of the new work will have application throughout DC schemes and can turn us on to DC pensions.
Nest’s finances today.
Nest displays the strength to satisfy analysis of the provider covenant. Nest’s capacity to pay pensions is based on the provider’s capital buffer.
I know you plan to have Paul Todd, Nest’s COO, at a forthcoming Pension Playpen.
I’m sure the attendees can be relied upon to ask some searching questions.
I also defer to your colleague, Phillip Persson’s insight and analysis, but personally I still sit on the fence until the sustainability or otherwise of Nest emerges from future annual reports.
The balance sheet still shows net liabilities of £913m.
The NAO audit report only confirms “ability to continue as a going concern for a period of at least twelve months from when the financial statements are authorised for issue.”
Unlike PLCs, which usually provide a viability statement going out five years, Nest’s own going concern statements go no further, although they refer to forecast estimates which, for example, assert that the DWP loan will be repaid to the UK government ahead of the repayment profile outlined within the loan agreement.
Perhaps there is scope to repay some or all of these fixed loans earlier after all?
But in the meantime the WACC interest rate is creeping up ever so slightly. This suggests the first instalment repayments, as I’d expect, for the oldest loan tranches with lower interest rates ruling at the time of peak quantitative easing?
Further analysis of the DWP loans is not given in the annual report, unless I have missed it. The document, like so many these days, is nearly 140 pages with lots of suitably diverse photos throughout, yet the financial statements don’t appear till page 100.
More analysis of Nest’s liquidity, which is expected of pension schemes under the proposed new SORP, would help this reader.
My queries about annualised investment returns (time-weighted are reported rather than money-weighted which would be preferable) remain.
Yes, I can reconcile the 9.9% pa for 5 years claimed for the 2045 fund to opening and closing unit prices of 1.8021 and 2.8856, but that may not be the whole story given such a large influx of new capital over the period.
I don’t expect Mr Todd to answer now, as he has chosen to ignore my similar comments in the past.
I shall just sit on my fence for now.
Well it will be a darn site more interesting a coffee morning if you or at least your views are aired. I expect Paul will read your comments with the same grim determination as he did to your criticisms of returns earlier. Nest needs to answer the questions we ask!
Sticking with Nest’s flagship 2045 fund then, Henry:
Nest say 1 year return (2024-25) is 5.9%.
They also say 3 year return (2022-25) is 4.6% pa, which means 2022-24 must be lower than 2024-25, around 3.9% pa?
Nest then say 5 year return (2020-25) is 9.9% pa, which means the returns for 2020-22 would have to be around 18.4% pa to compensate for the lower annual returns in 2022-25.
These above are all time-weighted rates of return.
Assuming the capital employed in 2020 is lower to begin with, before increasing contribution inflows each year, the money-weighted rate of return for the 5 years (2020-25) must be lower than 9.9% pa, maybe quite a bit lower?
Any actuaries reading this, do please correct me if I’m wrong!
The fundamental contradiction in age-limited pensions needs to be killed off a temporary annuity does not cut it. . A pension that terminates at age 85 fundamentally violates the basic principle of retirement income security – that it should provide guaranteed income for life, regardless of how long that life may be.
The proposal becomes even more problematic when you consider the demographics. If 30-50% of the current working population will live beyond age 85, this means that potentially half of all pension recipients would face a complete loss of their primary retirement income precisely when they are most vulnerable – at advanced ages when they have no ability to return to work, when healthcare costs typically peak, and when they may need expensive care services.
This creates a perverse situation where:
– The longest-lived retirees, who have contributed to pension systems for decades, are penalized for their longevity
– Women, who statistically live longer than men, would disproportionately bear this risk
– The proposal shifts the greatest financial burden to those least able to bear it – the very elderly who cannot supplement their income through employment
The entire concept of “longevity risk” being transferred back to individuals at age 85 undermines the social insurance principle that underpins pension systems. If pension providers cannot manage longevity risk – which is precisely what actuarial science and pooled risk are designed to handle – then they shouldn’t be in the pension business at all.
A genuine pension system must honor its core promise: income security for life, not income security with an arbitrary expiration date that coincides with when people most need financial stability.
Innovative DC will it go the same way as the innovative ISA (does it still exist) TRy getting that one through compliance.
John , your understanding of this misses the point that this is not a time limited pension, It is a lifetime pension that has bought insurance. It could have been insurance, they are choosing bulk annuities, it isn’t that innovative – it’s what happens in DB world. What is innovative is that DC pensions will be available to 14m people though I suspect that the wealthy will still seek flexibility through pension freedom.
The long lasting do best out of pensions, you could say that is unfair on the dead but that’s the deal, you don’t need a pension if you are dead – well as far as I know!
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