Last Tuesday, the UK Government announced that beginning in 2017, it would remove many of the restrictions that prevent the government-established NEST from fully competing with UK life insurers for pensionable assets. Increased competition from a government-appointed, low-cost provider is credit negative for UK life insurers.
The planned changes will permit individuals to increase annual savings into NEST above the existing annual cap of £4,500, and will allow transfers of existing pension assets to/from NEST, significantly increasing the program’s flexibility.
NEST originated in 2012 and is the UK government’s attempt to increase pension savings, particularly among younger and lower paid employees, through establishing a government-owned provider of pensions operating at low margins. In the UK, individuals can benefit from tax-advantaged annual allowances for pension contributions for as much as £50,000 in the 2013-14 tax year, which runs 6 April 2013-5 April 2014.
When NEST scheme restrictions are removed in 2017, NEST will become a more active competitor with existing UK life insurers and will likely draw inflows that would have flowed to insurers. Equally, the ability to transfer assets onto the NEST platform from insurers’ balance sheets will likely lead to net outflows of pension assets from UK life insurers.
Furthermore, the lower charges on NEST products will likely compel insurers to lower their own charges on pension products, particularly as NEST establishes itself as a viable competitor to existing life insurance pension schemes. By 2030, NEST estimates that it could control assets worth as much as £150 billion (a significant increase compared to the modest £8 million of assets under management from the 210,000 members it reported in June).
The exhibit below shows the total UK life insurance market, as measured by 2011 gross premiums, indicating those insurers we consider to be most affected by these developments: Standard Life Assurance Ltd (financial strength A1 stable), Legal & General Assurance Society Ltd (financial strength Aa3 stable), Aegon NV (UK entity not rated, AEGON NV senior unsecured A3 stable), Aviva Life & Pensions UK Ltd (financial strength A1 stable), Prudential Assurance Company Ltd (financial strength Aa2 stable), and Scottish Widows plc and Clerical Medical Investment Group Limited (financial strength A2 stable, both part of Lloyds Banking Group).
The downside risks from NEST’s increased competitive presence will be partially mitigated by the fact that the life insurers’ asset management arms will ultimately manage some of NEST’s assets. For example NEST also announced last Tuesday that Legal & General would manage part of its real estate portfolio. Furthermore, NEST’s target customer base will remain low to moderate earners, leaving unclear how many of its customers would be in a position to save more than the current limit of
£4,500 per annum. Finally, we expect that the key industry players will continue to try to differentiate themselves through enhanced service offerings, which may offset the cost advantages NEST can provide.
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