Nest’s research has caused a lot of controversy. Financial and Social productivity are top of the pops with bright thinkers like New Capital Consensus and Shared Future .
But Nest’s long term view is not something that Nest’s 14m members or any other workplace savers should pay for.
They shouldn’t pay by getting smaller pots and finally smaller pensions. That’s what this VFM chart of CAPADATA telling us. Nest is mid table but SEI is top. Nest’s investment strategy is not paying off just yet – will it?
That’s what a lot of smaller pension schemes are asking too . And a lot of consumer champions prefer the immediate VFM that smaller master trusts like SEI and Lewis Investments bring.
Let’s bear this controversy in mind when we read David Mann’s post.
Nest’s at a stage of its growth when it becomes not just to its members but to Government.
My guess is that someone , somewhere within the Treasury, has a judgement that it will only be when schemes get to NEST’s scale that we will see primary investment the country needs.
“Primary” means investing so something will happen, secondary investment is about replacing the investment of a primary investor with money to get the return without the risk.
We of course do a lot of investment into start ups in the UK (primary) but don’t come in to scale up (secondary). The primary investment is not done by pensions who are either not investing (DB) or ready (DC). Well that was until recently when some DC schemes got big enough (Nest) and some DB schemes decided to run on (Stagecoach Group Pension).
The problems that DC people have with investment that aims for productivity are numerous
- It may take some time for the value to emerge (if ever)
- The investments are unlikely to be liquid and are hard to sell to meet people’s requirement for cash
- The cost of doing this kind of work is huge compared with secondary investment, especially when the secondary investment is in funds investing in listed companies accessible through an index.
For all these reasons, the arguments for investing in UK productivity where the investment is primary are not popular with Jo Cumbo of the FT and many other consumerists.
Should pension funds make things happen in the UK?
The other side of the coin is the question “if not pension funds – who?”
Everyone moans that we do not invest money to allow our start ups and early stage companies grow. There is insufficient money for the projects we need doing to be done.
Investing in everything from technology companies to housing projects can be done by large pension schemes who don’t need the liquidity that small DC and DB schemes to pay claims (everything from people cashing , to changing funds to getting paid a pension).
Big funds like Nest with well over £50bn can consider making things happen. Nest has chosen to partner with IFM, whose UK face is Gregg McClymont.
It is more expensive to do things the way of Nest and the question is whether there are advantages. Are there opportunities for economic and social productivity? Will this investment deliver returns as patient capital tends to? Can savers into Nest take a long view?
Pensions are long term investors that are not just about maximising short-term opportunities. Indeed, missing out on the long-term premium that comes from sound investment, could be seen as a failure in the fiduciary responsibility of big schemes.
So now we come to the last big question that needs to be debated. Will large schemes who take a long-term view provide the immediate advantage of small schemes who take whatever opportunity is on the table. This is the argument of Steve Charlton of SEI in his recent conversation on the VFM podcast.
SEI have become for several years the top performing of the workplace master trusts, picking up profit from short-term opportunities. Steve tells us that SEI has an LTAF (a means to make these alternative assessments that make primary investment) but has yet to deploy it in its relatively small master trust.
Why- because it could hurt short-term performance (and hence Value for Money in TPR and FCA’s measurement).
Opportunism and VFM today or a long term strategy promising effective investment tomorrow?
I have no final position. The SEI approach has been hugely successful, it has provided a much better return than Nest has offered to its 14m members. But Nest is doing strategically what I know it should.
What do you think? Do you think this is worth a debate?
