The Government could end up providing Nest with a subsidy of up to £379m if take-up volumes are below expectations, Government figures show.
A European Commission policy document, published today, confirms the UK Government loan for setting up and running the scheme does not contravene EU state aid rules.
The UK Government predicts Nest’s set-up costs to be between £105m and £117m.
However, Standard Life head of pension policy John Lawson (pictured) says the figures are “light” and expects the set-up costs to breach the £250m mark.
The Government predicts the scheme will take 20 – 27 years to break even, based on take-up of 3m to 6m people by September 2016. Its total costs, including set-up and operating costs, are expected to be between £856m and £938m over the first 10 years.
Based on these figures, the Government estimates Nest will need a loan of £904m, with an additional subsidy of £235m.
However if there are low volumes of take-up, a loan of £1.275bn could be necessary, with the scheme receiving a subsidy of £379m.
Nest will apply a contribution charge of 1.8 per cent on members in order to recover the costs of setting up and running the scheme. The Government loan will be paid back through this charge.
Lawson says: “Nest faces an uphill struggle to break even. I think it is vastly overestimating the size of its target market, which I would expect to be around the two million mark.”
Nest Corporation’s costs could reach £325m, or £46m a year, between 2010/11 and 2017/18.
Nest is expected to employ 1,231 full-time staff over the period.