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Resolving NEST’s relative unknowns

Until the recent annoucement by the UK government, there were a number of outstanding issues surrounding the National Employment Savings Trust. Jonathan Williams asks whether these have all been resolved

Mandates, investment approach, exact details of the fee structure - all these aspects were relative unknowns for observers of the National Employment Savings Trust (NEST). That is, up until about two months ago when the UK government confirmed that the scheme for small and medium-sized company employees would go ahead as planned.

In short succession, both State Street and Tata Consulting Services (TCS) were confirmed as scheme administrators and administration providers, respectively. While TCS' appointment was already confirmed in March last year, after it was the only firm left vying for the contract, the award has now been agreed by the NEST's trustees.

Additionally, as we now know, savers will be charged 1.8% on every payment made into the system, as well as see 0.3% deducted from their overall pot at the end of each year to pay for fees other than the initial government start-up loan.

The 1.8% is slightly lower than originally anticipated, but still has many critics pointing out that, in real terms, it means that low-earning pension savers will lose £1.80 of every £100 contributed and that this will deter them.

The organisation is keen to stress that its charge structure makes it competitive with other large company schemes, but would not be drawn on how long the 1.8% charge will be levied- partially because it can not predict the number of members to be enrolled over the first few years.

The other 0.3% will go towards paying all management fees that the scheme will incur through its passive mandates, of which five so far have been unveiled (see timeline).
Further details about the scheme's investment approach also became known following the announcement of its mandates, with chief executive Mark Fawcett stressing its low-cost investment mandates.

The near future will see it shy away from hedge funds, as the performance fees charged by the vehicles is not compatible with NESTs stated goal of being a low-cost provider. Chief executive Mark Fawcett was recently eager to stress that this did not mean hedge funds would be ruled out forever, but said that their introduction into its investment universe would have to wait until such a time that economies of scale made them affordable.

Fawcett also said that direct investments in areas such as infrastructure, commodities and high yield strategiess would have to wait, but pointed to the scheme's diversified beta fund as a way of obtaining exposure to any of these asset classes, without having to go through the costly charges involved.

One of Fawcett's hopes for the new scheme is the creation of an internal market, as the nature of the scheme would require it to hold assets compatible with all of its target-date funds at any given time.

That said, he was not able to discuss details of NEST's available investment funds. While the default target-dated funds would see workers able to adjust their retirement age simply by informing the scheme, likely at six specific points during the year to avoid high administration costs, they will also be able to choose from four further options (see comparison with US Federal Thrift in this section).

As had already been announced, it is likely that members will also be able to choose between high-risk, low risk, religious-compliant and socially-responsible funds. These will likely be unveiled when NEST announces its investment principles in the new year, likely before the end of March.

However, while details have yet to be confirmed, head of investment policy Paul Todd did admit that a screening process would be in place to safeguard the ESG quality of the socially-responsible fund.

As is popular across many UK schemes, an investment board will decide on the scheme's investment universe, without going to the lengths employed by Sweden's AP buffer funds and actively excluding companies they do not find a common ground with.

Instead, the investment board will work closely with disputed companies to improve their performance. Of a company's socially-responsible track record, Todd said: "For all pension funds, it's not acceptable anymore to take no interest in it. With the attention on NEST, our investment committee and trustees will be taking it very seriously."

He believed that by persistently working with companies, institutional investors would be able to improve long-term returns for stakeholders. However, he was keen to stress that the investment board would see returns as its core concern, rather than any particular moral position taken by trustees.

While there are still many unknowns about NEST, such as the size it will grow to over the first five years of its existence, as well as the alternative investment funds for its members, the industry now has a better grasp of what to expect from the cornerstone of automatic enrolment.
 

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