Synopsis: NEST has issued an updated Statement of Investment Principles for the year to 1 April 2015.

Date posted: Friday, August 15, 2014

NEST has issued an updated Statement of Investment Principles (SIP) for the year to 1 April 2015. The update has been based on evidence and NEST’s experiences from the last three years. The principles are the framework for NEST’s approach to how it manages its members’ money. This SIP still assumes that the default for members will be benefits crystallised as a 25% PCLS and the balance used to secure a lifetime annuity.

Understandably, the there is no reference to the 2014 Budget announcement of the newly proposed Pension Flexibility rules to be introduced from April 2015. It will be interesting to see if this assumption changes in future revisions to NEST’s SIP.

Main Changes to the SIP

A new belief has been added, highlighting NEST’s strong commitment to basing investment decisions on longer term valuation considerations. This means NEST will actively choose to move away from asset classes it considers over-priced and will seek to invest in relatively under-priced or fairly priced assets instead that are likely to increase in future value. ‘As long term investors, we can take advantage of these opportunities,’ says NEST’s Chief Investment Officer Mark Fawcett.

To reflect this commitment, NEST has developed its existing belief about passive management in recognition of growing evidence that alternative indexing can be a good way to capture these opportunities while still keeping costs low. ‘We’re active in our approach to asset allocation, but where possible we’ll use index funds,’ Fawcett says.

A second new belief reflects NEST’s view that key strategic decisions of asset and risk allocation should be taken by an appropriately resourced and professional in-house team. Beyond portfolio construction, in-house functions should include active involvement in the procurement, governance and oversight of fund managers, and the scheme’s responsible ownership approach.

The scheme has also strengthened its belief in the value of incorporating environmental, social and governance risk factors into the investment management process, following new evidence conducted in partnership with FTSE that found statistically significant links between environmental risk factors and long term investment performance.

NEST’s updated investment beliefs are:

• Understanding scheme member characteristics, circumstances and attitudes is essential to developing and maintaining an appropriate investment strategy.

• As long-term investors, incorporating environmental, social and governance (ESG) factors is integral to the investment management process.

• Taking investment risk is usually rewarded in the long term.

• Diversification is the key tool for managing risk.

• Risk-based asset allocation is the biggest driver of long-term performance.

• Economic conditions and long-term market developments inform our strategic decisions.

• Indexed management, where available, is generally more efficient than active management.

• Integrating valuation considerations into the investment process can enhance our long-term performance.

• Good governance, including an appropriately resourced in-house investment function, is in the best interests of our members.

Commenting on the update, Mark Fawcett, NEST’s chief investment officer, says:

‘This exercise is much more than a regulatory requirement for us. Our only objective is to act in members’ interests, to achieve the best outcomes for them over their saving lifetime. That’s what our investment beliefs should help us achieve. We’re not just setting out our tactical approach here, this is about what we believe will deliver the best long term outcomes and is a framework that will guide all our investment decisions.

Our investment committee has spent a significant amount of time examining the evidence underpinning these beliefs, including new research into the attitudes and characteristics of our membership. This has convinced us we’re on the right track, but we could be even clearer about how and why we make investment decisions.

For our members, putting money aside for retirement’s all about protecting themselves for the future and they need the confidence that their money will be there for them when they retire.

For us, this means seeking the best opportunities to deliver on our investment objectives over the longer term, while understanding the need to manage the upsides and downsides of risk. That’s why we’re committed to making decisions based on sound evidence of the underlying value of assets and incorporating factors that are likely to affect this in the long term, such as environmental, social and governance concerns, into the decision making process.

And of course, since the chancellor announced greater flexibility in how members can access their pension pots from April next year, we will be developing our investment strategy and consulting on how we can ensure the best outcomes for members in this new landscape. Our investment beliefs will underpin all the decisions we make as a result.’

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