NEST, the automatic enrolment pension scheme set up by the UK government, is entering into a partnership with a specialist clean energy investor, with £250m (€291m) estimated to be committed this year in the UK and Europe.

A potential £1.4bn could be invested in total by the end of the decade, NEST said.

Following a procurement launched last year, it awarded a mandate to Octopus Renewables, which will negotiate bespoke deals with the owners of renewable infrastructure projects, predominantly in the UK and Europe.

NEST has committed to achieving net-zero portfolio emissions by 2050, for which it will use a framework developed by investors under the aegis of the Institutional Investors Group on Climate Change.

“We want to invest in the energy of the future, not the past,” said Mark Fawcett, NEST’s CIO. “The money we manage on behalf of our members needs to provide steady returns for the next 10, 20, 30 years.”

NEST, which is expected to reach £100bn in assets under management by the end of the next decade, manages the pension savings of nearly a third of the UK workforce. Fawcett said that by investing in green energy in the UK, NEST’s members would be “investing in projects they can see and touch, a tangible connection to their pension and a way out of the climate crisis”.

Stephen O’Neill, head of private markets at NEST, said Octopus “stood out among a very strong field of candidates”.

“They’re one of the largest developers of renewable energy assets in Europe, and carefully manage their energy price risk,” he said.

Octopus is the first appointment stemming from last year’s tender. NEST said it is currently considering appointing further fund managers for unlisted infrastructure equity.

“With predictable income, diversification and sustainable investment all at the forefront of institutional investors’ minds, renewable energy is an incredibly attractive asset class, for which demand is growing at pace,” said Alex Brierley, co-head of Octopus Renewables.

“This partnership will create a strong platform for NEST, covering a diverse range of technologies, geographies and assets across their lifecycle, whether that be at development, construction or operational stages,” he said. “The fund will also allocate capital to growth opportunities in the wider energy transition.”

Not just for DB’  

Nest is unusual among UK DC pension schemes in making substantial inroads into illiquid private markets, including real estate and infrastructure. In 2013, it began investing in unlisted and listed real estate with Legal & General, and has since then has begun to build up its exposure to infrastructure and real estate debt.

In 2018, Fawcett told an EDHECinfra conference that the infrastructure investment industry needed to “completely recalibrate” some of its thinking to “access DC investors in the UK”.

NEST now estimates that within a few years infrastructure equity projects will represent around 5% of its total portfolio. This in turn is expected to take the master trust’s investments in private markets to around 15%, which would be an estimated £13bn in the portfolio by 2030.

“Private markets are no longer exclusively for defined benefit pension schemes,” said O’Neill. “They will play an important role in our portfolio and help buoy our performance when public markets, particularly equities, are struggling.

“We are supportive of government initiatives that will help smooth the way for schemes to access the long-term return potential in private markets at the right price for auto enrolled members,” he added.

“We hope to be among the first of many DC pension schemes to offer members the diversification and return benefits available beyond equity and bond markets.”

Pensions minister Guy Opperman said he welcomed NEST’s decision to expand into “innovative and green markets” and that the move “should encourage other schemes to make the same leap”.

“NEST’s action shows that schemes with economies of scale can access alternative investments, including renewable technologies, at a low cost to their members.”

The UK government recently said it wants to create more flexibility for pension schemes to invest in illiquid assets, and confirmed it would be launching a consultation about the calculation of the 0.75% charge cap on auto-enrolment pensions and whether it should be amended to allow for performance fees to be smoothed over multiple years.

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