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.
