Whose NEST is being feathered?

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I’ve written elsewhere that I was broadly in agreement with NEST’s investment approach – concentration on default – use of passive funds (low volatility  and low cost), diversified  beta – all good stuff.

I am withdrawing my unqualified support.

I went to a good seminar the other night on Government Regulation. The assumption I went into the meeting with was that Regulation was designed to protect the consumer, my realisation during the meeting was that Regulation is there to protect Government.

Much the same can be said about default funds which are supposed to protect the average DC member (who I have elsewhere referred to as bunnies”)  from making stupid investment decisions including the decision not to invest our of fear of getting things wrong,

Reading the details of NEST’s default investment strategy, I draw the conclusion that rather than protecting the members , the strategy is designed to protect NEST from complaints from the members and ultimately Government from complaints about NEST.

I’m speaking principally about the weird decision to ease NEST investors using the default fund into equity backed investment through a “cautious balanced” approach to investment in the early years of their investment career.

The impact of adopting such a sub-optimal approach will be mitigated by the fact that investors will have insufficient funds for the approach to make much of a long-term difference. The upside impact is presumably thought to be that such inexperienced investors would otherwise opt-out of NEST when seeing their accounts reduce in value due to market volatility.

If you got confused by that last paragraph- my polagies- it was written in the kind of investment speak loved of people who attend events on NEST.

In everyday speak-this pat of  the NEST default investment approach is patronising nonsense and it s only merit is to NEST and Government (see opinion on Government Regulation above).

The sad truth for investment consultants is that there is ridiculously little for them to do in DC land. They can collect information on investment decisions, study the impact of alternate investment strategies and wonder about perverse behavioural patterns till they are long in the tooth but I have yet to see them make much difference to the way in which DC funds accumulate. They would be better off thinking about how to decumulate the DC pots using collective structures (but no more of that!).

The sad truth for DC investors is that they have to pay for investment consultants to pontificate about DC default strategies and put-up with the nonsense that arises (because if consultants couldn’t come up with something different from what everyone is doing there wouldn’t be any point of having them).

Which frankly there isn’t.

About henry tapper

Founder of the Pension PlayPen, Director of First Actuarial, partner of Stella, father of Olly . I am the Pension Plowman
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2 Responses to Whose NEST is being feathered?

  1. sipphound says:

    Not being a bunny, all this cautious cya stuff appals me. The risks we can see vs the risks we can’t: my investment has fallen in value this week/month/year (visible – but since I’ve got years to retirement I should really be dismissing this with a Gallic shrug) vs my investment hasn’t even kept up with inflation over the last decade because of my quivering timidity (invisible – I kid myself that it’s all good because it hasn’t actually gone down in nominal value).

    Just as people fail to exercise the OMO because of detrimental behavioural effects (that need tackling), they fear falls in investment values because they place excessive mental weight on downside. This too needs tackling. The Government doesn’t mind paying consultants so how about some man-coaching for investors paralysed with fear?

    And while I’m commenting, I don’t think you need to self-censor, Henry: let’s ask aloud again why scheme pension isn’t a NEST option, why does it have to end in an annuity? There, I’ve said it for you! 😉

  2. Pingback: The Pension Play Pen on good DC outcomes « Henrytapper's Blog

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