UK - Encouraging people to stay in the new National Employment Savings Trust (NEST) by minimising volatility is more important than taking a lot of risk with investments at the start, according to the Personal Accounts Delivery Authority (PADA).

Mark Fawcett, chief investment officer at PADA, told delegates at last week's NAPF annual investment conference "the investment strategy [of NEST] and everything around that is very much about keeping people saving, and saving more".

Although PADA can only make recommendations to the NEST Corporation of trustees who will have the final say, he highlighted that the amount of capital in the early years will be so small it won't make much difference how much risk the scheme takes.

For example he claimed the performance difference from age 23 in adopting a strategy of 100% equities lifestyling to one with a conservative start of 100% bonds is only 5% to age 65. Although he admitted this is "not to be sniffed at", Fawcett added that the scheme's success relies heavily on inertia and low action but this is "not much use" if high volatility causes people to give up contributions after five or 10 years.

He argued: "If we want to build a savings culture why give them [members] volatility. Keeping them in and keeping them saving is more important than taking a lot of risk in the early years."

However in his presentation on the results from PADA's investment consultation last year, Fawcett said there was now consensus that "diversification is the way forward", adding  "I don't think 100% equity lifestyling is the right approach for our members".

Some of the assets Fawcett suggested NEST might like to "capture" in its investment strategy over time include private equity; property; infrastructure; commodities; hedge funds; currency and high yield bonds.

But he warned NEST has constraints as a low cost scheme "and some of these assets are expensive to acquire". Although he told delegates that PADA is currently working with fund managers to "access some of these risk premia at a lower cost through innovation of solutions".
 
Meanwhile Fawcett confirmed target date funds is the preferred approach to delivering a lifestyling solution for the default fund, and said feedback to the consultation had indicated agreement for a limited range of these funds - around 40 - so that they can be arranged into cohorts of members.

The range of additional funds available to members outside the default is also expected to be limited to between 10 and 15, but PADA is conducting further research is being conducted on the demand and design for specialist funds such as Sharia compliant, and ethical funds. This is alongside reseach into risk graded funds such as a "low risk fund for those saving in later life", as he claimed this would give older people a further opportunity to save for retirement without taking excess risk.

Delegates at the conference also learned PADA will recommend to the NEST Corporation that the investment strategy should have a benchmark related to inflation as "protecting the real value of people's savings is vital". However the exact level of inflation protection targeted by the benchmark is still under discussion.

In the meantime Fawcett added PADA is carrying out additional research into attitudes of members to absolute loss rather than risk, and the behavioural impact of volatility on member attitudes to help further develop the investment strategy.

The NEST Corporation will take on the decision-making role of NEST from 5 July 2010, when Lawrence Churchill, chair designate of the NEST Corporation takes on the full role and PADA begins to wind up. It is expected NEST will then have a soft launch in the first half of 2011 to a select group of volunteers. (See earlier IPE articles: PPF's Churchill to head up NEST Corporation and Personal accounts to 'soft launch' in 2011)

If you have any comments you would like to add to this or any other story, contact Nyree Stewart on + 44 (0)20 7261 4618 or email nyree.stewart@ipe.com

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