NEST to become signatory to UNPRI, outlines investment approach

UK - The National Employment Savings Trust (NEST) has confirmed will become a signatory of both the UK Stewardship Code and the UN's Principles for Responsible Investment.

The announcement, made by chairman Lawrence Churchill, came as NEST unveiled its statement of investment principles and revealed potential asset allocations for those invested in their target-dated funds.

The defined contribution scheme also set out its performance goals, aiming to return 3% above the consumer price index over the long term.

Chris Hitchen, member of the NEST trustees and chair of the investment committee, said he was glad the scheme was not in operation in 2008 in light of these targets.

Hitchen said one of the scheme's most important principles was that understanding members' needs was essential.

He also said NEST believed it was important to be a "good corporate citizen", adding that these decisions would be made in the interest of members.

When challenged in later discussion about how corporate engagement would be possible in light of NEST's heavy reliance on passive mandates, chief investment officer Mark Fawcett said a responsible investment overlay would soon be in place in addition to engagement by the in-house team and the appointed asset manager.

He said UBS - one of three managers selected so far and in charge of passive equity management - was chosen not only because of its risk approach, but also because its views on responsible ownership were in line with the scheme's.

Fawcett later told IPE: "We will be using the overlay provider to initially just develop our approach, so that when we are a sufficient size and start thinking about segregated mandates or where we can vote for our own shares, we will have the ability to do that."

He said there was the additional possibility of a specific issue being of interest to NEST's members, in which case his team would work with the overlay provider on how best to engage with the comapny.

In a mock-up of a scheme member's asset allocation retiring in 2058 - in what NEST termed the 'foundation phase' - approximately a third of assets was allocated toward developed market equities and a similar amount in money market instruments, as well as both emerging and developed market bonds.

During this foundation phase - into which workers at the beginning of their career fell, with Hitchen estimating people would remain for three to five years - the scheme aimed to minimise losses to allow those new to the concept of retirement saving to adjust to the principle. The notion was that, through lower-risk investments, returns would at least match CPI.

He added: "By the time they reach age 30, we think they will be used to saving - frankly, they will be reaching a stage where we need to be earning some real returns - but in the foundation phase, we're not trying to do that."

During the second stage, termed the 'growth period', NEST proposed those invested in the target-dated default funds have a 70% exposure to growth assets - with 37% invested in equity, 33% in its diversified beta fund - while the remaining 30% would be allocated to both regular gilts and the index-linked kind, as well as a liquidity portfolio.

Hitchen stressed that the above was only for illustrative purposes and that the exact allocation would differ based on how close to the final, consolidation phase the member was, at which points assets closely alligned with annuities would begin to feature.

Those looking to maximise returns could opt for the higher-risk fund, with the scheme proposing around three-quarters of assets in this area be allocated to emerging market sovereign debt, with the remaining quarter invested across a number of other bond options, as well as developed and emerging market equities and real estate.

Churchill said on unveiling the scheme's investment principles: "Agreeing the investment approach is a significant landmark for NEST in achieving our aim of helping millions to save confidently for their retirement. The investment strategy will develop over time, and we are confident our approach will encourage saving and support our members in achieving their aspirations for retirement.

"To reflect our diverse future membership NEST's investment approach combines the reassurance of a carefully managed investment approach for the majority who don't want to choose, with a set of focused choices for members who do want to."

He said the decision to invest in global equities was based partly on the fact its members had already invested in the UK in terms of human capital and that diversifying into the global sphere was in their interest.

Mercer largely approved NEST's strategy.

Brian Henderson, European head of defined contribution pensions, said the scheme's decision to start members off with a low-risk strategy seemed sensible given the research undertaken on its membership's profile.

"However," he said, "the challenge will be taking care not to undercook the low-risk start, especially in light of the initial charges. Without sufficient growth to overcome the initial entry fees, there is a potential risk that the early year low-risk foundation stage could linger."
 
He said NEST would have to strike a balance between the risk of not building up enough funds for members and of losing money through risky investments in early years.

"A solution to this problem would be to ensure the scheme offers a range of truly diverse growth-based assets that will help manage the volatility of the returns," he said.