The pension scandal that left taxpayers with a £1.2bn bill

Telegraph

21-03-2025

Workers are paying thousands of pounds in fees to cover mounting debt and six-figure salaries at Britain's largest pension scheme, a Telegraph investigation has found.
More than 12 million employees save into Nest ('National Employment Savings Trust'), a government-backed scheme created to ensure that all workers can save into a pension.
The scheme was designed to be a 'low-cost' alternative to traditional pension funds when it was established in 2010 using a taxpayer-funded loan.
However, industry experts have accused it of offering members and taxpayers poor value for money, as high fees are used to cover a mountain of debt and generous staff pay.
The investigation by The Telegraph and comparison website, Finder, found:
Six Nest employees are paid over £250,000 a year, while 17 earn more than the Prime Minister.
Nest has failed to rule out keeping its 1.8pc 'contribution charge' after it repays its government loan – despite previously claiming the fee is only levied to pay off the debt.
A typical Nest member can expect to pay over £2,000 in contribution charges over their working life.
Nest's 'overly-cautious' investment strategy risks reducing the size of a member's pension pot by £6,600.
The firm's government loan was worth £171m in 2012, but annual interest and additional borrowing has seen the debt surge to almost £1.2bn.
Meanwhile, salaries have rocketed for senior staff. A Freedom of Information (FOI) request by The Telegraph found that six Nest employees earn more than £250,000, and 68 earn above £100,000.
It also revealed that 17 staff earned more than £172,153 last year, which is the Prime Minister's salary. This is up from seven in 2017, when the salary was £150,402.
Callum McGoldrick, of the TaxPayers' Alliance campaign group, said the number of Nest employees on high salaries was 'remarkable'.
He said: 'Any body receiving such significant taxpayer funding warrants scrutiny, including the Nest pension scheme. Nest needs to ensure that pay packets are properly linked to performance.'
Indefinite fee
Nest was established to support 'auto-enrolment' reforms, which have made it compulsory for employers to offer their staff pensions.
It now has around £50bn of assets under management in 'defined contribution' schemes, which invest the money in a mix of stocks and bonds.
Because Nest was created with the help of a government-backed loan, it has a public service obligation, like the BBC or NHS, to make sure every British employer has access to a high-quality workplace pension.
But its controversial fee structure has led to criticism over whether it offers value for money. While Nest does not charge employers for using the scheme, it levies two fees on employees.
The first is an 'annual management charge' (or AMC) of 0.3pc on the total value of a pot each year. Rival pension schemes such as The People's Pension and Now Pensions also charge annual management fees, typically between 0.3pc and 0.5pc.
Yet unlike other pension providers, Nest savers also incur a second fee – a 'contribution charge' of 1.8pc on each new payment into their pot.
Nest has insisted that the contribution charge is levied on members in order to pay off the government loan.
But when The Telegraph asked Nest to confirm that the contribution charge would be scrapped once the loan and interest are fully repaid, it refused to rule out keeping the charge. Nest instead said its charging structure was 'kept under review'.
George Sweeney, pensions expert at Finder, said he was concerned that Nest's business model had become 'dependent' on the charge.
He added: 'Nest has been taking this fee for 13 years and still owes well over £1bn to the Department for Work and Pensions, so there is a long way to go.'
Nest's debt was originally due to be fully repaid by 2032, but its current projected repayment date is 2038. In 2010, the Government estimated that Nest may not fully repay the loan until 2048.
Nest said that it had made its first repayment – of £6m – towards the £1.195bn loan in the 2024-25 financial year, and that the amount it would repay in 2025-26 has not yet been decided.
Tom Selby, of investment firm AJ Bell, said he was 'surprised' that Nest could not commit to scrapping the charge, as there was 'no obvious reason' to retain it once the loan had been paid off.
He added: 'As the scheme's membership and asset base grows, you'd expect the cost of administering each pound of assets would drop, and charges to follow a similar path.'
The contribution charge would cost an employee on an average salary of £37,430 £1,168 by 2038, analysis by comparison website Finder shows.
Meanwhile, someone who has earned £100,000 per year since 2012 will have paid £3,510 by 2038, assuming a pension contribution of 8pc.
If the charge is not scrapped, a worker on the average salary would pay £2,066 over their career, while someone on £100,000 per year would pay £6,211.
Nest insists that its 1.8pc contribution charge and 0.3pc AMC are roughly equivalent to an 0.5pc AMC over the saving lifetime of members.
However, Baroness Altmann, a former pensions minister, said the contribution charge was 'deeply unfair' and urged Nest to scrap it in order to turn it into a 'good value scheme'.
She said: 'I've always believed that the contribution charge is totally wrong and should be dropped.'
The way Nest explains its contribution charge is also confusing, according to Mr Sweeney.
Nest's website states: 'For every 80p you contribute to your Nest pension, we'll claim 20p from the Government on your behalf and add this extra money to your pension pot.'
But in reality, Nest effectively levies its 1.8pc fee three times – on the employee's £80 contribution, the £20 of tax relief, and the employer's contribution.
So instead of getting a 20pc tax relief top-up from the Government, Nest members only receive 18.2pc because of the contribution charge that's deducted – and just 98.2pc of their employer's contribution.
Mr Sweeney said: 'This is effectively a triple charge, with the employer's contribution and any tax relief getting charged this fee as well.'
Ms Altmann added. 'Having multiple charges is not in the consumer's interest because they confuse users about what the true cost is. You need full transparency. Maybe the pension regulator should have a look at Nest.'
'Bizarre' investment strategy
Nest's fund performance has kept pace with rivals in recent years.
Between 2020 and 2024, Nest's 'higher risk fund' has delivered cumulative returns of around 43pc. This is comparable to Smart Pension's 'smart growth fund' (53pc) and The People's Pension's 'global investment fund' (46pc). It is considerably higher than Now:Pensions' 'diversified growth fund' (25pc).
Unless a member makes an active decision about where their money is invested, their Nest pension will be placed in a 'default' fund, which involves four phases.
The first is the 'foundation' phase, a typically low-risk investment lasting five years when a saver is in their 20s. Nest says this is designed to help younger members get into the habit of saving regularly without being spooked by market falls.
However, avoiding risk at this early stage of an investment journey can mean missing out on higher returns in retirement.
A typical Nest saver whose pot is invested in the 'foundation phase' would end up with a pension pot £6,600 smaller compared to if they had been invested in the higher-risk 'growth phase' throughout, according to analysis by Finder.
Mr Sweeney said the decision to include the foundation phase in Nest's default fund was 'bizarre' and 'overly-cautious'.
Gavin Perera-Betts, Nest's chief customer officer, said: 'We charge enough to cover the costs of running a high-quality, best in class, pension scheme with the kind of sophisticated investment strategy previously reserved for the wealthy.'
He added that the strategy had delivered 'some of the strongest investment performance' of any UK master trust.
A Nest spokesman added: 'All our roles are based on independently benchmarked data using the market median, enabling Nest to create appropriate salary ranges and job brackets.
'Our competitive salary packages ensure we can bring in the right people from across the financial and private sectors to deliver this essential service.'