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.
Mr Fawcett said: “Many of our investors will be investing for 40 or 50 years. Our youngest member is 16 years old. For those members, the environmental risk in particular, but [also the wider environmental, social and governance] ESG risk, which tends to be long term, is really going to start impacting their portfolio during their lifetime of saving.”
Looking ahead, the scheme aims for greater adoption of investment strategies that emphasise the use of alternative index construction rules to traditional market capitalisation-based indices, known as smart beta.
Mr Fawcett said: “We think asset allocation should be broadly done by working out the risk you want to take and the risks you want to avoid and allocating on that basis. If you look at a smart beta equity portfolio, it tends to be focused on a particular risk factor whether that is momentum, valuation or volatility. It would make sense for us as we get larger to think about allocating to a particular alternative index funds in addition to market cap and climate aware.”
The master trusts’ proposal for a retirement income strategy that combines income drawdown, cash and a later-life annuity to cater to its members in the post pension-freedoms landscape was blocked by the Department for Work and Pensions in March.
This is not to say this decision is permanent. The DWP stressed it would keep the issue under active review in light of market developments.
Mr Fawcett said: “[The] need for that product is not massive at the moment because most of our members have very small pots, because we are a very young scheme, but that need will obviously rise and we hope that the market develops products that are aligned or similar to our blueprint or we could potentially collaborate with them.”
Friendly relationships
What of the DWP’s relationship with the master trust?
Mr Fawcett said: “It is very friendly, but not too friendly. To be honest I am being a little bit flippant here. From an investment perspective we are beyond arms length from government, so it has no influence on how we invest money and that is absolutely as it should be.”
Myron Jobson is a features writer of Financial Adviser
This article has been revised since original publication as regards the de-risking of target date funds.
MARK FAWCETT'S CAREER LADDER
2016-present
Chairman, international advisory board
EDHEC-Risk Institute
2010-present
Chief investment officer
Nest
2008-2010
Chief investment officer
Personal Accounts Delivery Authority
2006-2008
Partner
Thames River Capital
1999-2002
Senior vice-president
American Express Asset Management International
2000-2002
Chief investment officer
American Express Asset Management International
1991-1999
Head of Japanese equities
Gartmore
