Talking head: Nest's CIO Mark Fawcett describes how the scheme has been able to use its growing scale to reduce its investment costs, as well as effectively transacting between different scheme members.
When we first began designing our default fund range a key consideration was the need to understand our members’ characteristics, circumstances and attitudes.
We will also be able to expand the range of building block funds we use
We also knew we were likely to be a DC scheme of considerable scale, and that it was essential to design an approach that could meet the needs of millions of consumers who are not at the higher end of the income scale.
Our default fund structure gives each member an investment profile that matches their planned retirement date. Due to our expected size we’re able to offer a fund for each year a member could retire. We wouldn’t be able to do this if we were a small scheme.
Achieving scale is very important for long-term investors like Nest. Firstly, it enables broad exposure to a number of different asset classes at a low cost, which is central to both our commitment to diversification and providing value for money.
Secondly without the presence of scale, the scheme’s chosen investment model of target date funds would not be possible, nor would our promise to deliver this model at low cost..
Large DC schemes that adopt a target date approach can benefit from greater efficiency and flexibility in managing a member’s glide path compared with traditional lifestyling products.
A target date fund effectively pools all members of the same age, which means that just one trade is needed when we’re making transactions or asset allocation changes, which is much cheaper than making them on an individual basis.
Furthermore, our target date structure allows us to ‘net off’ transactions – put simply, we can ‘transact’ between the different retirement date funds and the members within them.
In effect we have created an internal market that reduces the amount of times we have to transact with the external market and incur the costs associated with buying and selling different assets.
As Nest welcomes more members the amount of money we manage will increase considerably.
This will give us the opportunity to explore other options in the investment toolbox, including exposure to new asset classes and more illiquid and alternative assets such as real estate and in the future, infrastructure.
We will also be able to expand the range of building block funds we use and have the option of bringing some outsourced functions in-house as we grow. At all times we are looking to maximise diversification while keeping tight control over the costs of investing.
Mark Fawcett is CIO at NEST
