Ducks get in a row for UK’s NEST

If there was an opportunity for a clean slate, what investments and service providers would provide the optimal structure for your members? The UK’s National Employment Savings Trust is preparing to receive its first contributions next year. Amanda White spoke with chair Lawrence Churchill about that privilege and challenge.

Long-term contracts with administration and custody providers, low cost to members, a defined contribution structure, and investment principles that focus on the membership’s tolerance for volatility are the overriding tenets of the UK’s newest pension fund.

With the chance to create a pension fund from scratch, there would be few who wouldn’t agree with the philosophy of simplicity, and it’s this that is guiding the chair of trustees of UK’s National Employment Savings Trust (NEST), Lawrence Churchill, the board and executive management.

While the strategic asset allocation is yet to be set – slated for December/January– initially it is looking to invest in a passive global equity fund, a passive UK gilts fund, a passive UK index-linked fixed-interest fund, a low-risk cash management fund and a diversified beta fund which invests in a broad, diversified range of asset classes.

Mercer has been named as investment consultant, Chris Hitchen chief executive of Railpen is heading the investment committee, and Mark Fawcett is chief investment officer. All the ducks are lined up.

The board, led by Churchill, is very focused on creating a fund that is suitable to the particular membership which is the unserviced low-income workers of the UK.

“We needed to tackle the market failure, where private companies were targeting their high-net-worth members, but there was no part of the market to service the low-income workers,” Churchill says. “The research we’ve done shows our target market has very strong characteristics that include an aversion to absolute loss, they are risk averse, and at best they may be a saver. It is a different population and so we have a new problem.”

With this in mind the fund will position itself as a low-cost proposition – 0.3 per cent a year plus 2 per cent on contributions – and the default will be target-date funds.

For the first five years there is a ban on funds moving into or out of NEST, which Churchill says will give enough time to assess whether this new low-cost structure is a danger to the established industry.

Churchill says while the investment principles are not set in stone, the fund will look for strategies that moderate volatility but do not impede on returns.

“Absolute return and hedge funds are all in the mix but we have to keep in mind our target market doesn’t even know what an equity is,” he says. “At the forefront of our minds is the fact this is not a mandatory system: they are auto-enrolled but can opt out, and in our research they’ve told us absolute loss will mean they’ll opt out and won’t come back.”

NEST has already made a number of crucial decisions regarding service providers, and has awarded 10-year contracts to both State Street as fund administrator, and Indian company Tata Consultancy Services for administration.

Churchill says the structure will be a largely outsourced model, and while he expects about 200 employees in-house they will be more “thinking” investment specialists, while the “doing” functions will be outsourced.

The UK Government estimates that around seven million people are not saving enough to give them adequate retirement savings. Two years ago, The Pensions Act 2008 established new duties on employers that will be introduced from 2012. For the first time in the UK, employers will have to enrol their workers into a workplace pension scheme that meets or exceeds certain legal standards.

Contributions, which will be a total minimum of 8 per cent split between employer (3 per cent), tax relief and the jobholder’s contribution, will be phased in gradually.

And NEST is a new low-cost pension scheme set up to meet these new legal duties, specifically designed to meet the needs of low- to moderate-earners and their employers.

It will launch in spring 2011 on a small scale with volunteer employers, to ensure it is ready for the onset of the anticipated higher volumes of employers and members from 2012.

But, it has grand plans. According to company documents, it expects initial volumes to be low but NEST is “anticipated to be one of the largest defined contribution schemes in the European Union”.

Some of the larger defined contribution plans in the EU include the DKK516 billion ($94 billion) ATP from Denmark, the NOR230 billion ($38 billion) Vital Forsikring from Norway, so it is no small task.

NEST has a seeding loan from the UK government, around £1 billion, that is payable at commercial rates. Churchill reports to the Secretary of State, but that is the only enduring political connection.