In 2008, the UK government had a serious problem. Corporate defined benefit plans had been closing for decades and defined contribution (DC) funds weren’t filling the gap. More and more people had no private pension savings, and social security wasn’t going to cope – meaning an increasing number of Britons would fall into poverty in retirement.
The government had three options: raise taxes to make social security more sustainable; get people to work longer; or make them save for retirement in a more meaningful way. They settled on a mix of all three. The retirement age rose, and will keep rising, while every employer was required to offer every employee a DC workplace pension – even if they only employed a nanny. The National Employment Savings Trust (or NEST, as it’s probably better known today) was established to make sure that everybody could access a pension that was compliant with the new regulations.
NEST received its first contribution of just £19 ($38) in 2011. It now manages £50 billion ($100 billion) and is growing at a rate of £500 million a month. That’s left it with the same problem that many of Australia’s super funds face: where to put it all. To try and solve that problem, NEST has lifted its target for private market investments to 30 per cent of the portfolio and taken a 10 per cent stake in IFM Investors, becoming the first non-industry fund shareholder. The deal was “serendipitous”, says chief investment officer Liz Fernando.
“Given the rate of growth we’re seeing we’re having to run really hard just to stand still,” Fernando tells Investment Magazine. “So it was pretty obvious that we needed other mechanisms to help us get deployment capacity increased in a thoughtful and high-quality way.”
NEST fit neatly into the IFM shareholder register because it looked pretty much like everybody else there: defined contribution, profit-to-member, with a long investment horizon and a burning need to deploy more money into private markets. It plans to invest £5 billion (circa $10.2 billion) through IFM by 2030. NEST gets owners’ rates from IFM, and as a large shareholder also gets to co-create product.
And while IFM was already building a bigger presence in the UK – in 2023, it signed a memorandum of understanding with the Sunak government to invest £10 billion in the country by 2027 – Fernando anticipates that NEST and IFM’s co-development of new products will also pique the interest of other UK-based DC plans. It’s a win-win, and builds on NEST’s existing model of forming deep partnerships with asset managers.
“We don’t see this as a private equity deal,” says Rachel Farrell, NEST head of public and private markets. “We see this as a strategic partnership, and to get alignment this shareholder commitment was required, because that, historically, has been how IFM has been formed. We have strategic partnerships with other managers – this is a slightly different way of doing it.
“We weren’t competing with other suitors because IFM was quite specific about what they were looking for. They were interested in adding a shareholder, but they wanted a like-minded shareholder and there’s not that many NESTs out there. It’s quite unique; it sits in the UK but it looks like a superannuation fund, for all intents and purposes, more than any other institution in the world.”
Now it’s all about putting capital to work, Fernando says. NEST is currently talking to IFM about a global infrastructure debt fund, which will likely be its first investment with them as an owner. More broadly, its young member base – the average is 40, and 98 per cent of its cashflow goes into the target-date fund purpose made for the age group – means it wants to bulk up on private equity. The fund’s previous private markets target was 20 per cent, but as it worked to enhance the size of the “pot” its members would retire with, it raised the bar – after carefully examining its liquidity requirements.
“The one thing with illiquid assets is that you never want to be a forced seller,” Fernando says. “And so we did very detailed modelling, target date by target date, likely net inflows compared to net redemptions. We basically modelled what the risk was of us being a forced seller. And with a 30 per cent target we have oodles of headroom. Thirty felt like a reasonable ambition but not so far out there that it would be unattainable.”
That “reasonable ambition” has been aided by a fairly muscular approach to fees; when it first launched its private equity program, NEST took a “very firm line” on not paying performance fees or carry, and it’s stuck with it. That doesn’t seem to have limited its options; it’s just kicked off a search for a US mid-market loans manager and is fielding plenty of interest.
“Not every manager can meet NEST’s fee requirements, and we’re very transparent about our needs,” Farrell says. “We don’t hold a grudge if they can’t – different managers have different models. A big mandate can be good or bad depending on the manager and what they need to do with their business at that moment, but we’ve historically found managers where that capital is useful to them.
“We have few managers and we see them as partners. We stick with them and they grow with us. If a manager isn’t particularly capital constrained, that’s a very useful way of having long-term capital that’s going to grow, because we tend to set up evergreen structures where we continue to put capital into that structure and it allows them to potentially fund multiple years of investments.”
NEST recently partnered with PGGM and Legal and General to fund build-to-rent real estate in the UK. For NEST, the investment ticked several boxes: it came with attractive returns, and by increasing the supply of housing in the UK it would also improve economic growth – all of which would help its members. It’s also tipping money into a thematic equities portfolio from Lombard Odier, a Geneva-based private bank with a significant asset management arm which it settled on after evaluating 26 managers. The strategy focusses on climate transition, natural capital and societal changes.
“We believe those are long-term megatrends that will increasingly be recognised by the market, and with that we’ll be rewarded as an investor to be at the front of those megatrends,” Farrell says.
