Look under the bonnet

Appearances can be deceiving, and sometimes this is a good thing says Mark Fawcett, chief investment officer at Nest

Take the bonnet of an Aston Martin – a sleek and simple silhouette topped off by the iconic badge, but underneath that bonnet there’s a hugely sophisticated piece of engineering excellence.

On the surface of it, the way Nest invests its members’ money looks pretty simple. And it is. For the member. If a member doesn’t want to make an investment choice, they stay invested in one of our forty six retirement date funds that is ready for the year they plan to take their money out of the scheme and there’s a broad spread of options for those who want to take more or less risk, or make an investment choice based on their faith or principles.

Simple? Well, yes. And it absolutely should feel simple for our customers – our research into our target market suggests they may not want to engage to any great extent with their retirement savings, at least in the early years of membership or when their pots are smaller. They want it done for them and they want it done well, but they probably won’t want to look under the bonnet – though if they do, they can be signposted to more detailed, but jargon-free information, but not overloading them with this sort of detail upfront.

But you, and your clients, will clearly want to look under the bonnet of those schemes available for complying with the new workplace pension duties from 2012. So what will you find under Nest’s? The simplicity of a member’s Nest 2050 Fund, for example, doesn’t tell the full story of the sophisticated approach to risk management that we hope will drive good outcomes for our members.

To recap, Nest subdivides the time over which members of different ages build up their pots in Nest retirement date funds into phases. We start with the Foundation Phase for members in their twenties – of about three to seven years – where we have an investment objective to achieve returns that match – after all charges – inflation. By the age of 30 at the very latest, members will be fully in the Growth Phase with an objective of delivering 3 per cent real return, after charges. This will be delivered through a diversified allocation to return-seeking assets such as global equities, property and emerging market and corporate debt. And in the run up to taking their money out of Nest, members’ pots move into a Consolidation Phase, with a greater proportion of income-seeking assets used to manage the significant risks of transitioning from growing a retirement pot to securing a retirement income.

In terms of what drives our approach overall, one of our key investment beliefs is that we should analyse both economic conditions and market regimes to drive strategic asset allocation decisions.

We know we can’t predict the future, but we do recognise that over time investment conditions change and we will analyse these conditions as part of our strategic decision-making.

We also recognise how investment conditions affect the risk/return profiles of asset classes, for example, equities tend to do well if inflation is low and stable and also maintain their real value in high inflation environments, but do poorly against a backdrop of deflation.

Economic conditions and market regimes have an impact on expectations on the likely level of future returns and the riskiness of different asset classes. Understanding this is key to making decisions that support better outcomes for our members.

We believe, therefore, that in order to achieve our investment objectives – that are rooted in a firm and evidence-based assessment of what our members want and need – the strategic asset allocation should be periodically adjusted to reflect changes in market conditions. We are a long-term investor, but we have the flexibility and the expertise to adjust to changing conditions.

Nest’s investment committee is made up of experienced trustee members who are supported in their judgements by our in-house team of expert investment professionals, our risk management systems and external professional advisors.

Of course, this is no simple matter, but a process our members don’t have to engage with unless they want to.

So, the challenge for corporate advisers in helping their clients arrive at the right solution for them will be seeing what’s really underneath the bonnet of all the options available, including those that look and feel straightforward for the saver.