Cuckoo in the NEST
With the planned launch of NEST (National Employment Savings Trust) quickly approaching in Spring 2011, the Government’s ‘delivery authority’, Nest Corporation, has just invited tenders from fund managers to run the different asset classes making up the ‘default’ investment option. This is expected to be the dominant choice of auto-enrolled members.
Because of the element of soft compulsion and its likely eventual size, NEST can be viewed either as an opportunity to lead and educate the behaviour of savers or as an obligation to do so. Looking for clues in what little Nest Corporation have said about the default strategy, we felt it was pandering to poorly-informed investor behaviour rather then emulating the current best practice in the area of pension funding. The main risk we could see was that inflation risk was not going to be well managed. Inflation is the cuckoo in the NEST.
We sent out a press release highlighting this risk and challenging Nest Corporation to be more forthcoming about how they planned to manage the default fund so that the ‘purchasing power’ nature of the liabilities, not just their duration, was well matched. Otherwise, the risk reducing strategies used in the target date funds for different retirement dates would not reduce risk, merely swap inflation risk for equity risk.