Big-Up for NEST’s investment strategy


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There’s a great article on Citywire from Stuart Fowler- you can read it here.

Although Stuart is critical of NEST for not showing leadership in design – I’ve been growing ever more confident that NEST is going in the right direction – especially with regards investment options.

In a comment I’ve left on the post I detail why

Stuart- what a good article. The Glide Path is a flexible beast and the more assets a target dated fund has within it, the greater the glide path flexibility. Glide paths for DB plans have been constructed around the fairly complex cashflow profiles of each scheme. By comparison, the liability profile of target date funds should be easy to define. The default fund’s default liability cashflow profile is 25% cash and 75% CPI linked lifetime income payments.

As you point out “it is theoretically possible to have all internal prices, and the exchange rate, perfectly indexed for inflation”. The Glide Paths of DB schemes attempt to get rid of unrewarded risks (such as inflation) by swapping out these risks at the right time. This use of “swaps” is standard practice among larger DB plans and there’s no reason that NEST shouldn’t use market opportunities in the same way (providing the funds are of a proper size and there continue to be organisations who want to do the swapping – counterparties).

In theory, target date funds could become “whole of life” funds provided that a counterparty could be found to insure the longevity risk. Put in everyday language, the target date fund could simply distribute a quarter of its value on the target date then morph into a deaccumulation fund paying out regularly to its membership (with the last payment being made to the last survivor). I’m sure there are people in NEST who have considered this!

I’m not sure this idea is that far from the original conception for with profits pension funds – (mutuality being replaced by a reliance on the financial markets).

As regards the “reckless conservatism” of an under-volatile accumulation fund, there is a trade-off that needs to be created between highly volatile high return characteristics (that scare members along the way) and lower volatility low return funds (that deliver below reasonable expectations).

The fund managers “philosopher’s stone” is the fund that provides equity like returns without the volatility – which is a great marketing phrase for DGFs . It relies on the free-lunch of diversified uncorrelated returns. I am sceptical about alchemy and about DGFs but I think there’s mileage in NEST exploring that concept too.

I’m interested in my pension but I’m not interested in managing the investments (I drive a car but don’t often open up the bonnet). If NEST can offer me a target date fund that is better managed, better governed and not overly-priced- I’d seriously consider transferring my personal pension pots into it (assuming they open for “transfer-ins” post 2017)


About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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