Personal Pension 

Feathering the Nest

Automatic enrolment will fundamentally change the pensions landscape in the UK. Not only will millions of people start saving for retirement for the first time, but over time these millions will also seek to turn their retirement savings into an income for their later life.

Nest has been established to ensure there will be an easy to use, low-cost pension scheme available to all UK employers to help them meet their new duties. The scheme is specifically designed to cater for those traditionally less likely to save for their retirement – typically people on low-to-moderate incomes.

So how will Nest help its members build up a retirement income and then buy a retirement income product if they need or want to?

Helping members get the most out of their retirement savings is a key consideration of the design of both Nest’s approach to investing members’ money and helping them with their retirement options.

In designing an investment approach that supports members in making the most out of their savings, Nest takes into account a range of risks throughout their time saving with the scheme including capital protection risk, inflation risk and conversion risk. To create an approach that manages these risks appropriately for the new savers created by automatic enrolment, Nest carried out a huge amount of research, including the 2009 international consultation exercise to which more than a hundred organisations and experts contributed.

It has also investigated its potential members’ experience of saving, their attitudes to taking investment risk with their money and how they react if the value of their money goes down.

We know, for example, that people in our target market have some of the strongest reactions to short-term investment ups and downs and in particular, losses. Despite often describing themselves as risk-seeking, younger people have particularly strong reactions to loss which may potentially lead them to opt out or stop contributing at an early stage in their savings career.

This is why Nest looks to manage investment volatility and significantly reduce the chances of short-term losses for its younger members. We then aim to ensure members can take advantage of market growth while reducing the possibility of significant falls in their pot, particularly just before they retire.

Our default investment approach, which we expect the majority of members to stick with, consists of more than 45 Nest Retirement Date funds. Most members will be automatically invested in a Nest Retirement Date fund that matches their expected state pension age. For example, a member would be invested in the Nest 2040 Retirement fund if they are expected to retire in 2040.

We expect up to 90 per cent of our members to invest in Nest Retirement Date funds, either through choice or as the result of not making an active fund choice. However our research also showed that some members will have specific needs or preferences around how their money is invested. This means we also offer a focused selection of fund choices for those who want a different level of risk, or an approach that matches their beliefs or faith.