Jeremy Hunt put pension reform at the center of his speech at the mansion in July. Photo: Aaron Chown/PA
The UK's largest pension system will start investing billions of pounds in private companies to support Jeremy Hunt's plans to increase the return of savers.
The National Employment Savings Fund (Nest), which looks after the pension funds of a third of the British workforce, said it would invest up to a fifth of its pension baskets in fast-growing companies over the next decade.
In an article for The Telegraph, Mark Fawcett, chief Nest's investment director, said the move would give most of its 12 million members the chance to earn «significantly higher» returns, with the risk spread over several decades.
He said: «We plan to increase our investment into the private markets in the coming years, including more money into unquoted stocks.
“Our point of view is simple — we don't want Nest members to miss out on an asset. class that is so in demand.”
Mr Fawcett said Nest, the UK's largest member pension scheme, would invest up to a fifth of young member pension baskets in private companies, which typically carry higher investment risk, but may generate higher returns than listed stocks.
The policy represents a significant vote of confidence in the chancellor's ambition to increase the risk taken by pension funds to boost future retirement income.
Mr Hunt placed pension reform at the center of his speech at the mansion in July. The chancellor wants the UK to compete with countries including Australia and Canada, which have huge pension schemes that invest in illiquid assets around the world, including British infrastructure.
1504 British pension funds are losing out to competitors
Risk-taking resulted in higher rewards. According to Moneyfacts, the average annual return on pension funds in the UK in 2021 was 9.5 percent. This compares with the 20.4 percent increase received by the Canadian Pension Plan Investment Board and the 22.3 percent increase received from Australian Super in the same year.
Defined contribution (DC) schemes such as Nest promise retirement income based on returns on stocks, bonds, and other investments, rather than an employer's promise to maintain a certain level of income after retirement.
In July, Chancellor reported to an audience of bankers and financial bosses at the annual Mansion House Dinner that nine of Britain's largest DC suppliers have signed an agreement to commit to investing at least 5% of their assets in unlisted shares by 2030.
Nest's push to allocate up to a fifth of its assets to young savers goes way beyond that. Mr. Fawcett said our younger members have “particularly great opportunities to invest in these asset classes” that are still decades away from retirement.
He said: “These members have a much greater the ability to hold long-term assets.» illiquid assets compared to participants approaching retirement age, especially when there are assets that can be held in portfolios for decades.”
He added that «in the not so distant future» this could mean that «a Nest member, 40 years after retirement, could invest up to 20 percent of their retirement basket in unquoted stocks.»
It is understood that General Nest's investments in non-listed equities, including private equity and infrastructure, will grow to at least 10 percent of its portfolio by the end of the decade, potentially channeling an additional £10bn into high-growth assets.
Nest, state-owned but operationally independent, currently manages just over £30bn of pension savings. This amount is projected to rise to £100bn by 2030. Fawcett said it would give Nest «the size and scale to make big deals» across a number of asset classes.»
2305 UK Pension Fund Allocation
Mr Hunt argued that his agreement with pension funds could help increase the pension an income of more than £1,000 a year for a typical worker over the course of their career.
The chancellor said: “British pensioners should benefit from the success of British business. .
“It also means more investment in our most promising growth-driven companies in the UK.”
However, the government’s own internal modeling suggests that the very high fees charged by private equity firms can reduce the profitability of pension savings.
High performance fees could make even savers putting £1,300 into private companies worse off, according to a Department of Works and Pensions analysis.
Mr Fawcett insists Nest pays no fee for performance “because of principle.”
He added: “All investments fit into our existing fee structure. This competitive fee structure also increases the likelihood that any net return on investment will meet our targets.”
Why we are investing UK pension savings in solar farms and fish and chip shops
Mark Fawcett, chief investment officer National Employment Savings Fund (Nest)
The chancellor's speech at the Mansion House back in July generated a lot of interest in the pension industry. In particular, the signing of the Agreement by large British investors with defined contributions (DC) on the allocation of 5 percent of their portfolios to invest in unquoted shares.
There are questions in some circles about whether DC schemes in the UK can invest in non-listed shares.
As a signatory to the Agreement, our point is simple: we don't want Nest members to miss out on an asset class that is so in demand.
There is a good reason why private investment is used in large pension schemes around the world. Average historical returns on private equity have generally been significantly higher than listed stocks over most time horizons.
At Nest, we considered a wide range of factors and data to support our investment decision. in private equity, because it is clear that if we can achieve at least a medium return, it will increase the overall return of the scheme.
We have focused on firms in the growth stage, as well as small and mid-cap buyouts. , as we believe these are the areas that will generate the most risk-adjusted rewards.
Since 2022, when we started investing in private equity, we have invested in a range of companies across a range of industries.
One example is Captain D's, a seafood restaurant chain serving British soul food. a fish and chips classic for the American culinary public. He has been in business for 50 years, but last year he was looking for additional investment to help continue expanding his business.
Another Nest deal is with Sekhmet, an Indian pharmaceutical company that is one of the world's largest providers of generic drugs. Both very different companies, but both have exciting investment opportunities.
Private equity assets present an attractive combination of less volatile valuations and higher expected returns than their liquid counterparts. This combination is naturally desirable for any long-term institutional investor.
Where pensions are currently invested
We have also used our size and scale to secure profitable deals. In principle, we do not pay performance fees and all investments are within our existing compensation structure. This competitive reward structure also increases the likelihood that any net return on investment will meet our targets.
The only difference our members should notice is that we now invest their money in non-listed stocks — this is a higher risk-adjusted return. in the long term.
This is why the debate about whether DC schemes should invest in unlisted shares is somewhat over, or should be, as long as those schemes have the scale and experience to access good deals. The future path of DC pension schemes in the UK includes illiquid assets.
The conversation should turn to how best to include non-listed stocks in a portfolio.
Having access to private assets is one thing, but can investment strategies be designed to maximize the benefits passed on to our members? Asset classes such as private equity are still more expensive than their public market equivalents and it is critical to select the right asset managers to provide the best value for money.
We believe that there is a particularly great opportunity to invest in these assets. classes for our young members. These participants have a much greater ability to hold long-term illiquid assets compared to participants approaching retirement age, especially when there are some assets that can be held in portfolios for decades.
This opportunity is not limited to unlisted stocks. We think there are opportunities in other unlisted assets such as infrastructure, not only in that they are extremely interesting investment assets, but also in how we can use them to connect with our membership.
Imagine telling a 22 year old who can save for retirement for the first time so that when they start saving money they can be invested in infrastructure projects like renewable energy, tangible assets they can see in the countryside around your home or close to the coast — for decades to come.
What a wonderful message we can share with young investors. This renewable energy will fuel their retirement throughout their savings journey. An unlimited source of energy that brings them money and also increases in price as they move to a low-carbon economy.
Nest recently updated its investment objectives and approach to strategic asset allocation. This is a new approach to better include non-liquid assets in our portfolio. We have changed our investment planning scheme so that younger savers have the highest percentage of participation, which is then rebalanced as they continue to save at Nest.
What does this look like in practice? That in the not too distant future, a Nest member who is 40 years away from retirement will be able to invest up to 20% of their retirement basket in unquoted stocks.
We plan to increase our investment in the private markets over the coming years, including more money in unquoted stocks. With our new investment goals, we are confident that we can deliver the best results for our 12 million (and growing).
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