The government has offered Nest a £329m “contingent liability guarantee” in order to ensure it is fully compliant under the new master trust authorisation process.
Rather than a direct payment this comes as a “contingent liability guarantee”. These funds are on top of the £622.7m loan, provided by the government to set up this workplace pensions scheme.
One of the criteria of this new authorisation process is that schemes must be financially sustainable.
This means that if an event occurs that puts the scheme at risk it must hold sufficient financial reserves to cover its gradual closure, without putting these additional costs onto the scheme members.
Pensions Minister, Guy Opperman says: “Nest is currently funded through a Government loan and, therefore, holds no financial reserves, The Pensions Regulator, who oversee the authorisation process, has suggested a ‘Letter of Comfort’ from Government could provide a solution, which for Government accounting purposes is described as a contingent liability.”
He adds: “This confirms that, in the remote possibility of a triggering event occurring, the government would fund Nest through to closure and meet any one-off associated closure costs. This gives a remote contingent liability of £329m.”
He added that the cost to the government in the event that it had to pay for Nest to be wound up would be £16.5m.
Following concerns about the regulation of master trusts, the Department of Work & Pensions introduced an new authorisation and regulation regime for these schemes, overseen by the Pensions Regulator.
It is expected that this will lead to significant consolidation in the sector, with 29, out of the 90 master trust operating in the market, confirming that they would not seek this authorisation.
However, this funding announcement may raise concerns among competitors, who don’t have access to these government-sanctioned funds.
Hargreaves Lansdown head of policy Tom McPhail says: “The good news for pension savers is the new regulatory regime is clearly no walk-over, with some schemes choosing to close down rather than attempting to comply.
“The scale of the potential liability for Nest is pretty eye-watering though, even in light of the fact they are the largest master trust in the UK.
“This news reinforces the expectation we’re going to see significant consolidation in this sector. It is also going to raise questions from some competitors regarding the scale of the subsidy provided to Nest and how this sits with state aid regulations.”