NEST Corp. on Friday announced the three-stage glidepath — foundation, growth and consolidation — for target-date default options to be used by the new U.K. nationwide defined contribution plan.
The National Employment Savings Trust, London, will begin this spring and is estimated to grow to as much as £200 billion ($324 billion) by 2040.
The options in the foundation stage, for those younger than 30, will be invested primarily in fixed-income strategies that keep seek to keep pace with inflation, as measured by the consumer price index.
At about age 30, members' investments would be moved into the growth stage, where investments target annualized real returns of 3%. Stocks, real estate and higher-risk fixed-income investments are added at this stage.
At age 55, members' assets are gradually moved into the consolidation phase, where investments are in bonds and cash. This stage's primary aim is to manage “conversion risk,” or the risk that wealth will be lost in the purchase of an annuity because of changing interest rates.
“We're not trying to shoot the lights out (at any stage), but we're particularly not trying to shoot the lights out in the early years,” Christopher Hitchen, chairman of NEST's investment committee, said at a news conference in London on Friday. Mr. Hitchen is also CEO of Railway Pension Investments, which manages the assets of the £20.4 billion Railways Pension Scheme, London.
The foundation stage's low-risk strategy is designed to keep members safe from severe stock market declines, which could prompt them to opt out of the plan, Mr. Hitchen said.
Asset allocation within the stages will be managed dynamically by NEST based on a risk-based approach that will seek to take advantage of long-term market trends and dislocations. Mr. Hitchen said that if the fund were currently running, the foundation stage asset allocation would be 47% “return-seeking” assets (passive investments in global equities and a diversified beta fund) and 53% “income-seeking” assets (government bonds, index-linked government bonds and cash). In the growth phase, the allocation would be 70% return-seeking and 30% income-seeking.
Aside from the target-date fund range, which will offer 45 selections based on yearly retirement dates, members can select a “higher risk” option that offers roughly a 60/40 split between stocks and bonds, a “lower growth” option that aims to track CPI, an “ethical” fund, and a global equity Shariah-compliant fund.
In a news release addressing NEST's glidepath, Brian Henderson, European head of DC pensions at Mercer, said starting off younger members with a low-risk strategy “is certainly different to traditional DC strategies.”
He warned, however that “the challenge will be taking care not to undercook the low-risk start, especially in light of the initial charges (of the plan). … In our view, NEST will have to strike a balance between the risk of not building up enough funds for the members and of losing money through risky investments in the early years.”
NEST expects to take on its first members this spring, with 25 employers planned to enroll employees into the plan by the end of the year.