All eyes are on the investment strategy of National Employment Savings Trust (Nest), the nationwide pension scheme that will be up and running next year. The retirement pots of millions of workers will depend on its success and if it does work, it could provide a blueprint for the defined contribution sector.
Mark Fawcett, chief investment officer, has been charged with developing the strategy that will underpin the scheme and last month it revealed its investment principles. Fawcett, 48, who managed funds at Gartmore and was latterly a partner at investment boutique Thames River Capital, admits he was surprised that the scheme has such a high profile when he arrived: it is a profile that is only going to get higher.
There will be over 45 Nest Retirement Date Funds, a series of yearly target date fund members will be enrolled into, that targets the year they expect to retire.
To be honest, when I joined Nest I had no idea quite how high profile the job was going to be
Controversially, younger employees will invest their initial contributions in assets of a low risk profile such as gilts, which goes against the general wisdom of financial planning. It is a decision that has, not surprisingly, stirred opinion.
At Nest’s rather humble offices in Borough High Street, just a stone’s throw from the gleaming mid-construction Shard skyscraper at London Bridge, Fawcett explained how he and his colleagues came up with the scheme’s investment strategy and why he thinks it will work.
Q.Why have you decided to adopt a low risk strategy for workers under 30 in a so-called foundation stage?
A.We have undertaken a lot of research on potential members – and we know that the majority of the target audience is more risk averse than those (older) people currently able to save for a pension.
Although older people say they don’t like to suffer loss, they seem to be able to live with it better and so don’t tend to act on falling fund values. On the other hand, younger people are more likely to act. They may say, “I’m not going to contribute anymore.”
Q.Is there an investment case for a cautious approach?
A.Yes. People are making a lot of noise about the foundation stage but it doesn’t matter how much risk you take in the first years in terms of the final outcome. The pot is so small in the early years and whether you invest 100 per cent in equities or 100 per cent in bonds it won’t make too much difference to the total return over 45 years (see graph).
The middle years of investing our growth stage will be the most important. All we are trying to do is introduce risk gradually to members, so the initial portfolio will be half in gilts and cash and half in equities. It is not ’no risk’, just lower risk. The strategy feels like the right judgment.
We had thought about having a foundation stage for all those of all ages but had we done that people would have said that we are being ultra-cautious to protect your reputation.
Q.Do you believe that Nest offers members’ value for money?
A.Contribution charges at some point will disappear after around 10 years and it works out that charges in total over the lifetime will be equivalent to around 0.5 per cent a year. We are not against active management, absolutely not. It is about getting value for money. We will introduce active portfolios at a later stage as the funds grow and when we diversify into assets such as property.
Q.Do you feel under pressure to deliver?
A.To be honest, when I joined I had no idea quite how high profile it was going to be.
The scheme’s trustees must feel the weight of that scrutiny and the amount of work we have done and evidence we provided them with is commensurate with that scrutiny. We have worked hard to get all the angles covered.
The financial media has quite a short memory, even when talking about someone like Warren Buffett, the world’s greatest investor. He bought Goldman Sachs shares during the credit crunch and was getting bad press because he hadn’t made any money in the first six months.
I am convinced we have the skills to manage the risk in way that is appropriate for our members. Sometimes that will involve making decisions that will involve a lot of scrutiny in the short-term.
We are not against active management, absolutely not. It is about getting value for money
Q.How hands on will you and your team be?
A.I have a team of experienced fund managers and we will have quarterly meetings with the investment committee. We will control risk of portfolio but our job is not to make big market calls.
There will be times when shares become volatile and become expensive and if this is the case we may trim back the equity exposure for those in target date fund about to enter the consolidation phase, or at least stop making contributions for a few months. But we will not be making a ’sell all our equities call’ across the board that wouldn’t make sense for someone who is 30 years old.
Q.Do you think that Nest will become the benchmark for DC arrangements?
A.No. Benchmark is far too strong a word, but I think we are contributing to the target-date debate. I’m proud of the focus we have put on understanding the characteristics of our audience. The target date funds are a good innovation for DC because it gives you flexibility to manage individual risk profiles right through their savings career. Good academic research supports the idea that you don’t just fix your asset allocation or even fix the whole glide path we don’t know what the world is going to be like in 30 years’ time, so why would we be arrogant enough to act like that.
Q.Do you think criticism of Nest is unfair?
The people who take the time to do the research and have an informed discussion give us a fair hearing. But there is a lot of chat around the edges. The only time I will be concerned is when the criticism is well-informed.