UK defined contribution provider NEST has said its comprehensive business continuity and disaster recovery (BCDR) risk management and mitigation plans have helped prepare it for the challenges of operating during the COVID-19 pandemic.
According to its recently released annual report, NEST Corporation – the provider’s trustee – saw its executive team meet daily from 24 February to review the latest information from governments, health authorities and the markets about the effects of the virus, and to consider their evolving approach to the highly dynamic situation.
BCDR plans were reviewed and assessed against likely scenarios, such as the possibility of organisation-wide work from home (WFH) for both NEST Corporation and the scheme’s service providers and suppliers.
Its executive team identified areas where further contingencies were needed, for example in procuring additional IT servers, it said.
The impact of the pandemic has also required several changes to the way NEST delivers its services, it added. Following the government’s guidance, it closed its head office and implemented corporation-wide WFH on 17 March.
It has worked closely with administrator Tata Consulting Services (TCS) to ensure the firm could deliver services to customers during an emergency. During the week of 16 March NEST approved TCS’s plan to carry out all of the scheme’s contact centre and back office services on an entirely remote basis.
Investments and markets
In the immediate face of the crisis, cash flow for companies and individuals was a main concern. In response the UK and US governments took steps in early March 2020 to shore up credit markets.
Otto Thoresen, chair of NEST Corporation, said shorter term investment performance in 2019/20 suffered due to the pandemic-related market volatility in March 2020.
“Although we fell short of our goal of outperforming inflation by 3% after all charges in the growth phase of our default funds, returns on these funds over five years have continued to outperform inflation after all charges. This is a testament to the resilience of our investment strategy,” he explained.
The scheme claimed its diversified investment strategy continued to help reduce the impact of market volatility on members’ money.
NEST’s credit portfolios are constructed to balance investments in more liquid markets with those in less liquid markets. The scheme is also strongly cash-flow positive, with strong annual inflows, the annual report disclosed. The trustee, therefore, has no current concerns about liquidity, it added.
Thoresen said: “As long-term investors we believe there are opportunities for members to benefit from the additional returns available from ‘illiquid’ – that is, less easily bought or sold – assets. Our allocation to private credit, such as infrastructure debt, is consistent with that.”
As for equity, the povider has a strategic equity weighting of 55% for its growth phase, with the capacity to have this weighting be higher within the scheme’s reference portfolio framework when appropriate.
This is relatively low among UK DC schemes, many of which are 70-100% equity weighted in their default funds, and puts its members’ funds in a stronger position going into the crisis, it added.
Before the COVID-19 crisis, the trustee had made several strategic decisions to position scheme members’ investment portfolios for the future. It set up and gained Financial Conduct Authority (FCA) authorisation for its wholly-owned subsidiary NEST Invest to support the evolution of the scheme’s investment approach into more sophisticated areas.
The scheme is already in the process of seeking managers for new private infrastructure equity mandates as well, including direct allocations to green energy and UK infrastructure assets.
It believes these investments can offer stable, long-term returns even in difficult market conditions, gaining from the economic shift away from fossil fuels and contributing positively to global efforts to tackle climate change.
“NEST has made good progress over the last year. The ongoing growth and development of the scheme and the effects of the pandemic will demand continued strengthening of our capabilities across the organisation,” Thoresen said.
NEST 2019/20 annual report facts (as of 31 March 2020)
- NEST managed £9.5bn (€10.3bn) on behalf of 9.1 million members and 803,000 employers (compared to £5.7bn, 7.9 million members and 720,000 employers for the same time last year).
- The Nest 2040 Retirement Date Fund has achieved an investment return of 4.6%.
- Fourty seven per cent of NEST members are female, 53% are male.
- The NEST scheme saw average inflows of £400m per month in new contributions for 2019/20.
- Nine thousand new employers joined NEST on average each month.
- NEST invested more than £1.3bn in the Climate Aware Fund, up from £600m in September 2018.