News - Pensions - retail
NEST’s reliance on gilts to provide steady growth in its default fund will leave many of the most vulnerable savers with the lowest income exposed to inflation, No Monkey Business (NMB) warns.
NEST's default fund, which people will be opted into unless they actively choose another fund, will contain a mix of global equities, UK gilts, UK index-linked fixed interest, low risk cash management and diversified beta vehicles.
Last week, NEST Corp chief investment officer Mark Fawcett revealed plans to invest members' money in three stages; a lower risk foundation stage, followed by a higher risk consolidation stage for the middle section of investors' careers, and finally a low risk consolidation stage.
Fawcett argues a loss during the first few years of saving into NEST runs the risk of spooking members and causing them to opt out, defeating the purpose of auto-enrolment.
However, Stuart Fowler, investment director at advisory firm NMB, says the reasoning behind the lack of investment in equities in the foundation stage has not been argued effectively by NEST Corp.
He claims using conventional gilts during the low risk stages is "a mistake" as these assets will be hit by inflation, damaging the value of the savings.
"The massive impact of inflation will simply replace equity volatility and a mistake like this would undo all the good work of ‘lifestyling' and keeping costs low," says Fowler.
"The state of the art for this type of investment architecture is Liability Driven Investing, not the outmoded ‘balanced management' approach, with its excessive reliance on correlations between different asset classes."
However, Fawcett says: "NEST is very aware of the risks of inflation.
"One of the recommendations that came out of our investment consultation was our investment objective should be focused on beating inflation because that is very important for our members.
"The Trustees are considering the investment strategy at the moment and the issue of inflation risk is at the top of their agenda."
Categories: Pensions - Retail
Comments
Completely Against Logic
This is the problem of pensions without advice.
Just because an individual may get spooked because the value of his fund has gone down in the first few years of investing should not mean an investment in Gilts.
This goes completely against the logic of investment and the type of lifestyling offered by insurance companies whether good or bad.
Clients in the early years of saving for the long term should embrace risk not abandon it. Just look at those that have done so over the past two years with regular premiums.
Posted by: Bob Donaldson
17 Nov 2010 | 18:10
LDI vs Balanced Management
LDI and Balanced Management are neither competing investment styles, nor mutually exclusive. There is no reason why any pension fund, whether it be defined benefit, defined contribution or the NEST fund, should not use both investment styles. In fact, I would argue that every pension should contain both elements. Just as some of the actuarial consultants have finally realised that a defined benefit scheme contains two sides to the equation; assets and liabilities, so does a personal pension. There is no upside, only downside, in running a liability mismatch, so every liability should be hedged where possible. Then, the remainder of the assets should be invested to achieve an "absolute return". This should be done through "balanced management" (my definition, not that of the majority of the investment industry) to achieve a return that has the highest Ulcer Performance Index (not Return, Sharpe Ratio, or any other measure). This will result in a fund that has the highest chance of meeting and beating the required funding level, and the lowest chance of failing to meet the required funding level.
I am sure that all this is obvious to Mr Fawcett and he does not require my assistance, but I am happy to offer my services anyway.
Posted by: Israel Cohen
24 Nov 2010 | 21:08
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NEST default investment strategy - enlightened or fraudulent?
I hope Mark Fawcett has some recognisable investment advisory qualifications, as he is setting up this fundamental investment strategy. Has it been tested against the need to provide a decent (whatever that means) level of pension income?
Anyway, I think the strategy to offer gilts at the start and gilts at the end shows a subtle collusion with the need of the Government to have a 'cash cow' to sell its debt to and hence reduce the need for it to manage the economy in line with good fiscal principals. Also, of course, it can screw the investors by selling ever lower and lower gilt coupons because it knows most of the investors will have no say and just take the default that's offered. It's close to defrauding the pension savers of the entire nation and needs unpicking quickly.
Posted by: Orlando Furioso
17 Nov 2010 | 17:57
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