The National Employment Savings Trust (Nest) is small from an asset-under-management perspective – at £1.6bn – but is tipped to grow.
The government-backed master trust that was launched back in 2011 specifically for auto-enrolment is, according to Mark Fawcett, the organisation’s chief investment officer, positioned for future growth.
In order to implement this, the scheme’s default fund was set up as a series of target date funds as opposed to adopting the traditional lifestyle approach in which pension scheme members are automatically switched into less riskier assets as they approach retirement.
The target date approach eases the administrative burden when it comes to the de-risking process as changes are made to each fund in a tailored way and applies to members of each cohort, Mr Fawcett said.
He added: “It gives us the ability to trade between different funds so we do not have to go into the market and so we are not creating market friction.”
Diversified portfolios
The scheme aims to provide investors with a fully-diversified portfolio with a healthy blend of active and passive asset strategies – all at an ongoing annual management charge of 0.3 per cent. The levy makes the scheme one of the cheapest in the market. A contribution charge of 1.8 per cent on each new contribution into a member’s retirement pot also applies.
A recent report commissioned by the Defined Contribution Investment Forum highlighted that some of the UK’s biggest master trusts have a skewed focus on cost over value and this threatens to create a race to the bottom.
However, Mr Fawcett said: “In our case absolutely not. We are about delivering value for money. Some of that value comes from the quality of investments, some comes from the price you pay for it. We think we can get the best of both worlds partly because of our size and partly because of our ability to work with the managers and build long-term relationships.”
The asset allocation framework is devised in-house by Nest and then set down to different fund managers who are given full discretion to buy and sell assets on behalf of the scheme.
Sifting the wheat from the chaff
They are each tasked at covering a single asset class – be it equities, investment-grade credit, high-yield and growth credit and real estate assets. Fund managers undergo a competitive tender process, which, according to Mr Fawcett, is aimed at sifting out the wheat from the chaff.
The list of check boxes includes good risk management and the ability to operate in a defined contribution environment where inflows of capital are commonplace as well as the adoption of a coherent process and philosophy including integration of environmental, social and governance risks.
The latter has become an important consideration for the scheme – so much so that Nest shifted a tenth of total investments in its default strategy by investing £130m in a new climate aware fund.
