The announcement of the investment strategy by NEST gets no easier to understand, no matter how long one studies it. In defiance of all standard pension investment approaches, the investment strategy has been established as a cautious approach for the early , or foundation years; this applies to people under 30. This is followed by a growth strategy which will be for the middle years and a return to a cautious strategy for the consoldiation phase as the employee nears retirement.
This diminishing of the possibility of growth during the early years, which have the most opportunity for compound growth across the lifetime of the pension, is a strange decision by NEST. What could be behind it?
The answer given by NEST is that it is afraid that an early high risk strategy could lead to losses that will make younger people opt out of the system, leaving them with no pension provision whatever. However, the fact remains that if NEST’s investments give a poor return, then maybe people are better off saving for retirement in other ways. It certainly doesn’t fill one with confidence that NEST are already focused on poor returns before the first penny arrives in their account to invest.
One sincerely hopes that it is not just a means of keeping the numbers up, for NESTs remit is to provide an investment opportunity for low and middle paid workers to provide from themselves in retirement. Keeping the numbers in the scheme high for their own sake may be in the government’s interest as the sponsor, but it appears to militate against the personal interest of the saver.
Despite the much-hyped low cost base, more of which anon, there seems to be a good case for people to challenge the result when their retirement pot is realised, as the investment strategy does not appear to be operating in their personal interest. If one of the life companies were to take such a patronising approach and announce that they were reducing the overall investment gain in order to keep the numbers of policyholders high, I would think that the FSA would be in there investigating before I have time to finish this paragraph. And a good thing, too.
Albert Einstein famously stated that ‘The most powerful force in the universe is compound interest”. The much-maligned private sector providers will be giving the benefit of this to their auto-enrolled members by pursuing growth strategies from the get-go. However NEST has decided that maximising individual returns is less important than maintaining numbers within the system. It would be cynical to suggest that this might be more linked to the fact that the current decision makers can be judged on the opt-out numbers but not on the overall results, as they will not be around when the pension pots of 20 year-olds are crystallised. But NEST really need to come up with either better reasons or a better strategy than this.