How is your pension invested? An interview with Nest

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0:34After your trial, you'll save an extra£5 a quarter on the subscription, which is exclusive to Making Money listeners. And that's moneyweek.com forward slash money. But there's a link in the description if you just want to click that. This is a really, really important, you know, it's a really important financial asset that 30 million people have got. The most valuable thing most people will probably own. Could well be. Do you have a workplace pension? If you do, it's likely with Nest. With over 13 million members, it's one of the UK's largest pension schemes. Paul Todd is COO of Nest Invest. They decide how your money is invested.

1:09So how do they invest your money? Are they delivering the best results for you? And why on earth did they remove the option for 100 % equity funds? You talked about agency. You said it's important that people have choice. The Sharia Fund was changed. People were choosing that fund not because of the religious lien, but because of the 100 % equity exposure. So you kind of remove that choice?

1:32i want to start with um a probably quite a big question but a simple one to say why was nest set up uh so nest is part of those big sets of reforms that came into place about 2012 and the whole aim was to get um more people saving an occupational pension because coverage had been going down for about 10-15 years so there's these big reforms called automatic enrolment reforms and that meant there was a duty on all employers to enrol their workforce into a qualifying pension scheme and to make minimum contributions. The individual could opt out and there's a real concern that you're putting this duty on employers that they have to offer a pension scheme and they might not necessarily be able to find a pension scheme that would service their needs particularly if they're quite a small company or a lot of their kind of workforce was quite on low pay.

2:27So the idea of Nest is we're just like any other occupational pension scheme, but we have a public service obligation that we have to take any employer who wants to use us. So it was to make sure the automatic enrolment could work for all employers. And one of the things that's happened since we've been set up is that we've also, I'd like to think, kind of driven standards as well um what good occupational pension looks like particularly for people who are on sort of medium to to low income so that was always our kind of focus um those people who perhaps weren't high net worth individuals who wouldn't get a lot of advice or or support in their kind of savings and the whole automatic enrollment reforms have been incredibly successful in terms of you know the priority was getting more coverage so instead of i think we're down to about 30 40 percent of people had access to a workplace pension that's up to 80 percent now so that's a huge shift in the uk in terms of kind of workplace saving um and nest has been a been a part of that that success yeah the auto enrollment was more successful than even the guys who introduced it thought they thought that the opt-out rate would be much higher didn't they like the nudge if you will it's about 10 people opt out i think of yeah i think it's less than that for finessed but but not around about eight or nine percent or something and ten percent across the industry but the original modeling and it's one of those ones that it's really really hard to predict what people's behavior is going to be so you ask people what would you do if you were put into a pension scheme and lots of people said oh well you know i couldn't afford it and things like that so the modeling for from basically from kind of survey questions and looking at how it works um elsewhere was up to 30 percent of people would opt out and that just hasn't hasn't happened um i think we're just in at the end of the kind of first phase so we've got people saving the question is now are people saving enough what happens when they get close to retirement how do we support people um to to turn that saving into what most people want which is so an income or retirement or a wage replacement when when they do retire yeah because if you read the dwp communication at the time which i have sorry department of work and pensions yeah there There you go.

4:44There you go. It was pretty clear that they felt that, you know, 8 % plus state pension, so 8 % match contribution, which is kind of the minimum requirements, plus the state pension was a start. It wasn't the solution. I do think that auto-enrolment has been super successful in getting people into pensions, but it's also created a bit of apathy around retirement savings. And I'm not sure if, I think many people actually think that the 8 % is enough. Do Ness think it's enough? I think that is a real danger. Automatic enrolment relies on the behavioural economics of inertia, that people want to do things, but it's just difficult to get round to it.

5:23So if you can switch that around and say, okay, it's entirely your choice, but we'll put you in it, and if this doesn't work for you, you can opt out, or you can stop saving if it doesn't make sense at some point. That's incredibly powerful. and a lot of the kind of survey stuff is people are really, really glad that they're saving. I think the danger is when the statutory or the mandated kind of levels are what they are, people assume, well, you know, government have said this or this is what the law says, this is the right number. What the right number is, is incredibly personal. So it depends on what your wage is, it depends on how long you're saving and things.

6:04So there's lots of debates and lots of discussions about what is adequate. I think the stuff that you're referring to came from the Pensions Commission, which made those suggestions which DWP, Department of Work and Pensions, took forward. And that was, I think the idea was that you'd get, if you're on an average earning, you'd get about 30 % replacement rate from the state pension, the reform state pension. then something like automatic enrollment would top that up by another 15 to 18 percent and then there'd be an expectation that people might want to make voluntary contributions on top of that for another 15 to 18 percent which gets an average worker to about two-thirds replacement rate so if you're on um you know if you're on 50 grand um two-thirds of that would be um let's say you come might be like 30k or something like that 30 to that yeah um and it's that but but whether that's suitable for everybody it is comes down to a lot of kind of personal um personal needs so i think at nest we have a nervousness of there could be the potential for people on quite low incomes over saving um when they're um that they're spending money on their pension which they may actually would be better off spending on day-to-day or you know on their kids or or on things like that so getting that right is not as straightforward as the answer should be more than eight and then things um i think there are other things that need to be done in terms of some of the some of the ways they work out the contributions are on a band of earnings so it's not your entire earnings qualifying earnings yeah that's right so so there are kind of um things like the lower limits on that or what age people start saving i think it would definitely be be good i think that they're all proposed on the statute books that that should come in at some point so i think that would definitely be a good thing to do um going forward then whether or not the actual statutory minimum should go up i think it needs more debate and more discussion about for some people particularly people on kind of more medium or higher incomes then maybe yes they they should be saving more and if they can be nudged to do that in a helpful way that's probably a really good thing people on lower incomes i think got to be quite careful about about what we do because the danger is you're really wealthy in retirement but you're really struggling quality of life yeah it's it's not a it's not a simple simple straightforward issue i think and it is like a blanket approach at the minute with the eight percent to get started yeah superannuation is the the scheme that I would say from Australia, is it?

8:47Yeah. That you alluded to other parts of the world. I imagine that's the scheme that they look at because they seem to be about two decades ahead of us. Yeah, that's right. The big difference there is it's all employer contributions, I think is my understanding. That sounds nice. Yeah, yeah. To the employees, anyway. And they've spent a long time. They've bounced around a bit. I think they're at 12 % now, but sometimes it's 10, governments change, and they change it around. The other big difference in Australia is compulsory. So there's no kind of opt out. And I think my take on that would be, it's a really powerful thing, the ability to opt out.

9:24And as we just discussed, not that many people are opting out, but people like, you know, that kind of sense of agency that it's their money, it's their choice. And the people who know about their finances, the people who know about their finances best are, it's not us, it's individuals. They know how much their money has to stretch for day-to-day things and stuff so again you need some simplicity you need some kind of blanket rules and i think that that's what what makes sense but at the same time we can't forget that people have individual circumstances speaking of blanket rules or general rules is there anything that you think people should need to know about their pensions their nest pensions that they don't know i just found out recently i have an s pension that was a start like we always talk on the show about you should look at where your pen who's your pension provider move some things around and then i was like i called my old work and i was like who's my pension with they're like ness i'm like oh funny enough you've got them coming on the podcast so is there anything you think people should know about their ness pensions that they don't yeah so so i mean i think the first thing is it's good that they've got a pension we're starting to and we we talked about this just a little bit before before we started the podcast about that the ness needs to um to get its name kind of more recognised and stuff so people can understand a little bit more.

10:45Because this is a really, really important, you know, it's a really important financial asset that 30 million people have got. The most valuable thing most people will probably own. Could well be. Like when, you know, if you're saving for 30 or 40 years, like that will be a big amount of money at the end. So one, definitely who is your provider and the fact that not all providers are the same and there are things out there that de facto, So they do kind of rankings of different pensions providers. So having an understanding about which pension provider you're with and are they any good, I think is the first thing.

11:22The second thing that we've found, particularly because over the years, we've done loads and loads of research with our members, or people who we think are going to be our members before we had members. And when you talk to people about a pension, and then you talk about investing, there's a real disconnect between that. because for most people when you talk about a pension that's about an income in retirement you know they're thinking estate pension or pensions when you pay pay me money um a lot of the time when we explain to people we're investing your money and it's a defined contribution pension and that's that's a new set of terminology that unless you're in the industry why would you know anything about that and then we're investing your money in stocks and shares and they could go up and go down a lot of people are horrified by that it's like this is my pension why are you taking any investment risk with it so i think we've got a big job to do and we're we're starting to do that um i don't know if you've seen any of our videos but it's like this everyday investor campaign and it's about making people realize that not only are they in a pension scheme but that money is invested and there are huge benefits for investing in terms of how quickly that money can grow compared to putting money under a mattress or even like sticking in a building society because a lot of the time when you ask people about most people's experience of financial services are things like banks and building societies and possibly premium bonds and things like that the idea of long-term savings vehicles and the idea of investing in shares or property or infrastructure or private equity or things like that these are really really kind of like it's quite foreign and it's quite scary and when we ask people about it they go oh yeah investments for those people in the city and they're all a bit wide and they're all a bit kind of kind of slick and there's a lot of there's a lot of skepticism and nervousness so part of this everyday investor campaign is about trying to demonstrate to people that investments isn't something that people over there do this is what you're doing you own a bit of this company you own a bit of this wind farm and one of the first campaigns we did which i thought was really powerful we took some of our members on a boat out of grimsby docks in in the northeast out to um one of the hornsey wind farms which we have bought on behalf of our members and took them out there to see these enormous kind of like wind turbines and said no no you own a bit of that and that's generating extra return for you in retirement and good dependable return it's going to lower energy bills in the future and have kind of more predictability about your energy bills because we're not reliant on getting oil from places which are you know potentially conflict and you know we've all seen what's happened with with energy kind of kind of costs as well but the other thing is it's employing people in grimsby so your community is getting benefits from this so this idea of circularity that this is about making money for your retirement It's about benefiting your kind of local community.

14:23And it's also having additional kind of impacts. Like there's going to be this huge transition from a high carbon economy to a low carbon economy. Massive amounts of money to be made in that transition. Why shouldn't our members take part in that? And I think, to my mind, which is quite a powerful thing about Nest, is, you know, we can be our members kind of champions and get access to things that they would have no chance of getting access to. on their own because they can't bring enough money to make it worthwhile but when you put all that money together and we're running i think it's 47 billion kind of right now we're taking in six seven hundred million every single month so seven or eight billion every single year that allows us to do things that you couldn't hope to do on your own or if you could do it on your own you'd have to pay an enormous amount of money in fees and things so so somebody can make a profit This engagement within pensions is definitely something that I think is quite interesting.

15:23So, you know, you're talking about encouraging people to understand investing. I don't know if people even understand the importance of their pension in the first place, right? Do you know how many people log on to Nest? I'm going to figure it. I think the last time I saw it, it was about 20, 30%. So 70 % people don't ever log on. A lot of people don't log on or they log on once. and then um you know maybe they'll log on once a year when we send an annual benefit statement but a lot of people just don't realize that you know as you said that they don't have a nest pension and that is a massive challenge for us but it's a massive challenge for the whole industry yeah no 100 it means that you have a lot of responsibility in terms of like stewardship of their funds right and you do that typically through the default fund yeah what percentage of of your customers are in the default funds do you know 98.8 basically everyone yeah basically everybody yeah and the way that i would see that then is you've got millions of people in one fund and it can't be too hot can't be too cold it's kind of you've got to sit it in the middle is it you've got to cater to everyone at once yeah so um part of the automatic enrollment kind of rules it's set out in legislation is when people are automatically enrolled into a pension scheme um they don't have to make a choice because as we've just been talking about that's a difficult choice for people to make if they're not had experience so any qualifying pension scheme has to have a default strategy and that default strategy has to meet kind of certain kind of conditions so when we were thinking about it exactly to your point that we're gonna have millions of people and i think our prediction was at least 90 of people would be in the default fund and we've exceeded our predictions and maybe that'll change over time as people get more more engaged but when you look internationally when you look in the uk default strategies tend to be around that kind of 90 even in things like um even in banks kind of pension schemes where you think people were quite financially savvy and stuff default strategies tend to be where a lot of people go so i think we were super super concerned about the idea of a one size fits all and not just having one default fund so in effect what we've created is 50 default funds one for every single year that we expect our kind of members to to retire in and then it that gives us a flexibility to have a different approach to risk and return and what we're investing people's um kind of money in mainly based on their age at the moment so that's the that's the number one kind of factor because we we definitely have that information so when an employer uses nest they have to give us certain information and one of those things is that their date of birth so we can work out um what their expected retirement date is we can peg communications off that but for us really importantly we can make decisions about how we invest it so we want to invest people in their 20s differently from people in their 50s and 60s because they've got different needs they have different risk appetites they've got a different length of time to to save so we are trying to be as sophisticated and as granular as possible with 13 million members money bearing in mind we have limited information about what their needs are so we spend an enormous amount of time trying to understand underlying drivers so we put a lot of kind of time and effort into research about socio-economic characteristics where do people live how much do they earn what kinds of educational attainment do they have how can we make predictions about what their kind of future earnings could be and what what that should mean in terms of because we're trying to build up a holistic picture of somebody's kind of wealth so it's not just about their pensions do they own their own house are they renting a lot of our members the majority of our members are in rented accommodation and will continue to be in rented accommodation into retirement the solutions they need are quite different from somebody who owns their own house or maybe has a couple of properties or has big pensions defined benefit pension which is the more traditional um their their ability to absorb risk or their needs to achieve kind of certain kinds of returns are different.

19:45As we get kind of further into this, I think we can do more than just focus on age. So we can start looking at pot sizes. We could start looking at what levels of contributions people are making. Can we actually start building up a more nuanced picture of who our kind of membership are? And then does that mean we should be doing different things in terms of the way we invest it? But I think for people in their 20s, 30s and 40s, genuinely the aim is we just need to grow this money. We need to grow this money as fast as we think is kind of sensible without kind of going crazy with the amount of risk we take.

20:21Why do you de-risk in the first five years then? So we don't de-risk. Well, you tap the brakes through there. Don't tap the brakes. What do you call it, the first five years? So we've got a foundation phase. Foundation phase. What is that then? So the aim of that is a lot of people in their kind of 20s this will be the first time they've ever saved in a long-term savings vehicle, like a pension. The biggest contribution to your pot for the first five or 10 years is whether or not you contribute. Doesn't matter what investment return you get, because there is so little money. First year, you're putting in£500.

21:01You get 10 % return on that, or you get 2 % return on that. It doesn't make that much difference in the long term we also did a load of kind of behavioral research into what people thought about risk and loss and returns and things it was really really interesting and it kind of backed up a lot of behavioral theory about it's called prospect theory this idea that people are twice as concerned about losing money than they are about yeah gaining kind of money a loss feels worse than a game yeah yeah um and when we kind of looked into this there was a real kind of there was a real age kind of bias um and when you spoke to younger people about well you know we could put you in a pension scheme and this could happen and this could happen and stuff like that but you know in the long run it'll all be fine and we we kind of mocked up things like kind of newspaper headlines like stock market crash and and we sent people mock benefit statements saying, oh, your money, you've lost 20 % or 30 % or 10 % or something like that.

22:02Really trying to test, you know, nobody likes losing, but what other kind of triggers? And what we found with young people was the emotional kind of reaction to the idea that they didn't really know what this thing was. They've been kind of put into it. They've got loads and loads of other things they want to be spending their money on, but, you know, fine. Somebody said it was a good idea and stuff. And then we've told you that you've put all this money away that you weren't that bothered about doing and we just lost 20 % of it and the kind of messages were that's it I would stop saving I would never save again and I would tell everybody I'd ever met that I'm not going to save in a pension because this is an absolute kind of con so we've got this kind of behavioral information whether or not people would do that it's difficult you can't really test that because you don't want to make people lose money so this is all kind of theoretical and then when you think about kind of different investment strategies you can take, whether you, traditionally the idea is, oh, if you're young, you can take a load of risk because it'll all work out in the end and markets go up and down and then it comes back and stuff, which is fine, provided you keep saving.

23:06If you stop saving, you miss out on all of that. So the idea of the foundation phase is, can we reduce some of the volatility? And when we're talking about volatility, we just mean the ups and downs and stuff. So it's not saying you're losing this money it's like if you do own a house the value of your house might go down and stuff but unless you're selling it on that day it's a kind of it's a paper loss and things like that um so so we spend lots of time thinking about how can we still get really really good growth but reduce some of that volatility early on when we kind of first started out the best way of doing that was just putting kind of slightly less in equities so instead of putting 60 or 70 percent in equities we were putting kind of 40 or 50 percent in equities and more in kind of lower risk assets as we've got bigger and we've started investing in things like infrastructure in property what we call kind of a liquid asset so if you again if you think about a house it's quite an illiquid it's quite hard to sell on a day-to-day basis and things it's even harder to sell a wind farm on a day-to-day basis that this is a 40-year investment that should be kind of throwing off income.

24:16So for younger people, instead of just putting more in kind of safer assets, we're putting much more in illiquid assets. So long-term kind of great kind of return kind of prospects, but lower volatility. And the whole aim of this is not to make them have less money. The whole aim of that is to get people confident in the savings habit that this is a good idea, I like what's happening with this money, without kind of giving up the potential for upside. So it's been kind of, at times it's been characterised as, oh yeah, we just stick everybody in cash for the first five years. Completely not true.

24:53We always took people in growth assets. It was just in a lower proportion. Now, because we're bigger and we can do kind of smarter things, we're giving people much more access to these kind of assets that you don't need to sell them for 40 or 50 years and you'll just get that kind of steady return. Does it reduce expected returns in that period, the foundation period? Very, very minorly now. It does. A little bit before when it was more of a bond equity kind of shift. Now we're moving it more to kind of a liquid. Because the bond equity, I know you said, like it's not de-risking. That is de-risking, right?

25:34Moving from 70 % to 50 % is just a traditional way to de-risk a portfolio, you know? yeah i mean it's not de-risking because they were starting in that foundation no i get it but what what what i think about so sometimes i think you can kind of over study things and you can go out to the market and you can ask the kids or the 20 year olds if you lost 20 percent in money how would you feel and they'll be like oh god i would pull it out but these people aren't even logging on because only 70 70 percent of people never log on to the thing they're auto enrolled in they have no choice yeah and they're not engaged so why not when they're not doing that get get them the return you know like chase yeah i mean the returns are marginal and it's a kind of it's a it's a it's a trade-off between the most important thing probably for the first 10 or 15 years is you keep contributing that's the thing to dominate your pot for the first 10 or 15 years it's only after then that the kind of compounding effect and the returns that you get really really kind of um start making a difference and it's kind of i mean i i've i've had these debates a lot over the last kind of 10 10 15 years um that we've modeled this over and over again and the difference in outcomes from having a slightly lower risk start early on and we're not even doing that now is so marginal it was like one to 1.8 percent at the end it was such a small difference one one in total value of pot or average annual returns total total okay i was gonna say one percent annual return would be a big difference 25 yeah yeah um and it's like we won't know until we know though right we'll never know like you've got to go down the path before you kind of know where it ends absolutely and then the big challenge as well and then this has been kind of put to us as well there's no counterfactual because you could say oh well nobody's opted out and we go well of course somebody's opted out because we have this foundation phase yeah and you could test it but then the people who opt out they're gone and then yeah what about the other end then so there's like a let's not call it de-risk you call it whatever you want but there's this like taper off for about 15 years ish before retirement age so again so the the traditional approach that it would be kind of like lifestyling and this is what um defined contribution pension schemes always used to do so there's sick people 100 equity for the first 20 or 30 years a lot of it would be uk equity quite a risky strategy and then for the last 10 15 years um they would gradually you know 10 10 10 over a 10 year period reduce you down to just bonds and cash no thought about when you did that so markets could have just tanked and then you kind of bake in all those kind of losses and put it straight into bonds terrible terrible idea um the rationale for it and again it's it's a bit about kind of default and people not engaging and stuff and people um try and try to protect themselves to a certain extent the rationale for it is an economic one and it's all about this idea that when you're young you've got loads of human capital and they they define human i think you're gonna hit the red button they define like human capital by um you know when you're young you've got like 40 years of kind of earnings and stuff and that's like that's a massive kind of source and wealth if you can work for 40 years and stuff by the time you get into your 50s and 60s your human capital is getting smaller and smaller and smaller um and therefore you can withstand kind of stock market shocks you're much less kind of insulated from that because if you're 30 and the stock you know the market crashes and stuff you've still got another 30 years it's going to come back you know one would hope hopefully yeah um but when you get into your 50s and 60s you've you've kind of lost that insulation so the idea of kind of like de-risking into kind of more kind of bonds and cash what was to try and it's trying to think about your wealth not just as your pensions wealth is thinking about your earnings capability and then things like that so there's a definite logic to that and we subscribe to that to a certain extent but a bit of it depends on what is your destination longevity as well is longevity risk you know people probably need to stay invested longer don't they absolutely and that's exactly what we've been doing um we've been doing quite a lot of work on this that in the olden days you have to buy an annuity the law said the only way you could access your defined contribution pension scheme was to buy an annuity i mean we've discussed this before but further than you it's almost like an insurance product where you buy they guarantee you an income for life so you just hand over your pot or a pot and then they say okay we'll pay you x amount whether you live for a year or a thousand years we'll pay it so it's kind of like a form of insurance you might explain it better than that but that's a brilliant explanation it's it's it's insurance for it's but well the original idea was it's insurance for living longer than you expect to so you can you can have a reasonable expectation of how long you're going to live but what happens if you live another 20 years after that and you've got no money that's that's not great state pensions and annuity in a way yeah kind of yeah yeah it's guaranteed and one of the key features of annuities is you're you're sharing um um kind of longevity risk so you're putting all lives in to um a kind of a single pot some people will die earlier than others and the people who die earlier the other people get get that money and things and it and it's one of those things that when things are so uncertain you kind of need to kind of share that risk it's very difficult to manage that risk on your own unless you're super super wealthy so it's they are kind of they are good products but they've ended up they ended up being products that people were using to generate an income from their 60s rather than what we think is that they should be there as an insurance for living much longer than you know your mid-80s or something you buy an annuity near the end with the pot or is that what you're saying so that's our kind of that's our plan so what we want to do to exactly your point we want to keep members invested in capital markets in all sorts of kind of growth things for as long as possible so there may be an element of de-risking because because we don't want people exposed to you know 100 private equity when they're in their 70s and things um but the focus now is instead of like targeting 65 and you now have to buy an annuity at 65 it's more now kind of targeting basically kind of 75 80 um with our investment approach and setting aside a little bit of money to buy our plan is the idea is to buy deferred annuities which are like annuities but you buy them at one point so you lock in an income at some point in the future you should probably around about 85 so i completely agree that the argument about de-risking um when you're getting older is the exact opposite argument to the argument i made about why the foundation phase it doesn't really matter whether you take loads of risk or not a lot of risk it matters inversely the other way around because that's when your pot is the biggest so the amount of money you can get in terms of returns from investing in growth assets is huge it has a massive kind of gearing effect which is just not there when you're in your 20s or 30s because you haven't got any money because you've only just started contributing um so our aim is how do we keep people exposed to growth assets without overdoing it and running the risk of there's a real danger when you start drawing your money out that you can get into a death spiral where markets are crashing frequency risk it's exactly that um markets are crashing and you're taking money out of it so your pot just dropped 10 and you've just taken another five percent out so your pots now drop 15 and you're trying to generate an income yeah kicking it while it's down basically exactly that and stuff and there are all sorts of kind of things that i think we can do lots more on and we are doing more on the one thing i would say is like a lot of our members are still i think the average age of our members is kind of late 30s now so whilst we do have quite a few members in their 50s and because they only started saving with us fairly late their pots might not be that big anyway so quite a lot of them will probably just be taking a pot as cash and things there's only so much we can do we can't necessarily generate incomes from that um but but our overall aim is as long as people want it we want to help people have a sustainable income and the highest possible sustainable income that we think is kind of realistic that lasts for life that they don't have to spend their time what we've seen in Australia which is really interesting is as you said they're about 20 years ahead of us really successful people got really big pots they have not cracked how to do the retirement piece and you've got things like people in their mid 80s with more money at 85 than they had at 60 because they are terrified of running out of money so they don't spend and what we want to do to our members is say you should spend we should help them in terms of what we think is a sustainable kind of income rate, but we want to get as much money to you as possible early on in your retirement or if you're in semi-retirement, because that's when you're more likely to be healthy.

34:44That's when you're more likely to enjoy things. Whereas when you get into your 80s and 90s, maybe your consumption and your expenditure goes down a bit. Last time we recorded, Tomei, and you were having some real dramas with your accountant. So how's that been going, mate? They're sacked. So drama was sorted um they're a big corporate firm um they didn't really reply to my emails very quickly like took a week or two at times um and they charged me way too much i mean i've got pretty simple taxes and yeah they were charging me thousands they saved me some money but yeah um i had to move on slow and expensive pretty much yeah this is one of the reasons that we're really happy to be partnering with tax app it's a tech platform that makes self-assessment simple whether you're self-employed like me a freelancer or a director like demo big dog instead of sending endless emails, bills and spreadsheets to your accountant, you just connect your bank, answer a few questions that are only relevant to you, and your tax return can be ready in as little as 15 minutes.

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37:20That's Vanta.com forward slash making money. There's a link in the description, though, so you can just click that. do you think that people i mean i want to ask are the default funds going to change then because it kind of sounds like you're it's like an evolving strategy we're changing all the time yeah do you think that people should look to get out of the default funds i mean for the vast majority of our membership they haven't chosen because they've defaulted into it if they were to choose that's where i put that's where i put my money um that's where just because of the scale and because of the access to the different asset classes, you know, we're giving people access to private equity that normally you would have to be paying huge fees to fund managers.

38:04We, because we're big, can negotiate really, really, really kind of low kind of fees and stuff. So we're giving people access to an incredibly sophisticated investment strategy that's being overseen by, there's 40 of us working within the investment function at Nest, but that's all we do all day, every day, is just sit and kind of make sure that we're investing that money. correctly and holding the managers to account and thinking about kind of stewardship things um thinking about how the companies are investing in or acting on you know on corporate governance or health and safety and you know we're doing all these things i think our fund choices are good um but we really carefully kind of curated how many fund choices we had six is there um maybe well once you there's a couple of retirement ones there's also like every iteration of the default I think you've named them well.

38:55I think the way you present them versus others, Aviva, is very confusing. Some people have like 1 ,000 funds, and the names read code more than they do. Yours, you can... It was really, really deliberate. It was supposed to be... The reason why we call a higher risk fund the higher risk fund and not the higher return fund, we didn't want people to go, oh, I like higher return. We want people who understand there's a relationship between investment risk and return to recognize that so they know they're going into a higher risk fund it should be a really realistic assumption that they will get higher returns you know some of the times the same with the kind of lower growth fund we didn't call it the lower risk fund because all of our members from some reason not all of our members a significant proportion of our members would be like why would i want to take risk with my money this is my pension i'll go in that fund so it was supposed to be exactly it was supposed be a bit kind of ron seal like you know it does what it says on on the tin um and then we've got the ethical fund and we we might talk about the sharia fund a bit more um but but these are they they range of kind of people who might have specific specific needs that aren't being um aren't being solved by the default fund and we had long debates about what is the right number of choices and to your point that if you give people a thousand choices all the research says you just you cause paralysis like there's too much choice all the evidence suggests if you have a reasonable number of choices and i think that range is somewhere from about five to 10 or 11 or something and those choices are properly differentiated because you talked about the thousand funds um that one of the insurance companies offers i bet if you look at the underlying um what what's underneath those an enormous number of those are basically exactly the same and they're just packaged up in in different ways and then we've done some studies on this where you kind of look at the risk return characteristics and things they all just cluster in the same place and stuff that there's like one or two um um different kind of like risk ratings of the fca and other things do and they're all pretty similar so the only difference between them is a lot of the time is what you're paying for them um but it sounds great you know people love choice and so you should give people as much choice as possible but if that means that people who genuinely want to make a choice get put off making a choice that feels to us like we've made a mistake whether or not we should be offering some other funds it's definitely a debate we can come on to and stuff and i think that's that's really well let's talk about that like ability to make a choice you talked about agency you said it's important that people have choice and obviously recently the sharia fund was changed and you acknowledged within communication that people were choosing that fund not because of the religious lien but because of the 100 percent equity exposure yeah so you kind of remove that choice yeah it was like we know you're doing it but yeah we're making this decision yeah yeah so it's i mean we didn't know why people were making those choices we had some suspicions because you can look at you can you can see some of the characteristics and stuff and um you could see um how much money was going into it and things like that but from the very beginning the original rationale for for offering a sharia fund um and we spent a long time debating whether we should or not and why a sharia fund and not different um other kind of religious faiths and things and we've got this um we have this kind of like framework for decision making that has to hit kind of so many you know is there anything in the market that we can actually buy to to offer is a member detriment if we don't do it what is that member detriment does it fit with our operational and one of the key questions is can it be diversified because diversification is an important um important tenant to us in terms of our investment beliefs about how you should invest and stuff and and we were it was a very kind of like in the balance of whether we should offer this at all because one we couldn't find any diversifiers.

42:58All we could find was an all equity kind of strategy. The second thing was, we couldn't find any way to de-risk as people got a little bit older. So a lot of nervousness about putting people into a product that's 100 % equity, and it could still be in 100 % equity in your mid 70s. That felt kind of quite uncomfortable. So the rationale was, it's important to do it. we don't think there's a lot of demand for it and we did some really interesting research into British Muslims in the UK and their attitudes to long-term saving and Islamic finance and it was really interesting and their attitudes with just like everybody else not a lot of understanding of long-term financial products not a lot of understanding of Islamic finance when it comes to pensions that was quite eye-opening that this wasn't kind of front of mind that people would say no I'm a good Muslim, I pray, I fast and things like that.

43:57It wasn't being linked to your bank account or your mortgage or something like that. The key driver was our nervousness about employers, particularly employers who may have kind of big Muslim workforces and things like that, feeling that they may be kind of prejudicing against their kind of workforce because they were automatically enrolling their workforce into a pension scheme. And a lot of their workforce may feel that they couldn't actually save and would have to opt out. And then that would feel like discrimination. So a key driver for it was more about employers. It was always kind of unfinished business.

44:34So, OK, we can set this up and we can use this fund. and the fund we use is HSBC Islamic Fund, which tracks a Dow Jones index. And there's a board of Sharia scholars on the Dow Jones and HSBC have their own board of scholars as well that are saying this is in accordance with Sharia law. We also wanted to put some diversification in that, whether that was going to be some kind of alternative to bonds could we do anything on property nothing in the market that we could find our kind of price point that would actually fit with our operations so it was kind of unfinished business and we've been spending the last kind of 10 years trying to trying to find that now we are able to do that because products have been developed and we've got to a different stage we thought we should be doing this as soon as possible because the aim of this fund was particularly for those kind of reasons that I set out and our nervousness about exposing people to the wrong levels of risk.

45:39We did think that there would be some people who wouldn't be very happy about this because they'd gone into it for an all-equity strategy. It was really difficult to survey people about this because it's just quite hard to reach people. So we have tried doing surveys and things. Didn't get a lot of hit rate from anybody in the Sharia Fund um we've got a kind of panel of kind of members it's really difficult to find people from the Sharia Fund who are on that on that panel and in some ways the changes we've made and the response we've had and also doing this podcast and stuff is this is really helpful like we can't say we want more engagement and more discussion and then we do something and people engage with us and we go well we didn't want that kind of engagement and things um so I think for us we think it was the right decision in terms of for those members who want to do this from a faith-based completely recognized that some people wanted an all equity exposure whether or not that's necessarily the right all equity exposure because it's not just that it's all equity strips out finance strips out finance heavy tech so yeah i get what you might very very kind of narrow i think there's about 80 or 90 stocks that's that's quite quite it's not like a um like an index fund So our main exposure in the default fund to developed equities is through UBS.

46:55And we've got, there's a climate tilt on it, but it's basically replicating the market. So there's about 3 ,000 stocks in that. That's proper diversification, even though even that's being a bit dominated by tech. So what we're going to do with all of this kind of feedback, which we have definitely taken on board and is really, really, really positive, is to think really, really hard about what we should be doing for those members who are more engaged. and they are quite a small minority and stuff. But that doesn't mean they shouldn't have a voice and they shouldn't have... It's their pension.

47:27It's their money. It's exactly that. And what we have to do, we have to kind of balance, we're trying to serve 13 million people. We can't have a fund for everybody's kind of needs. How do we balance the complexity of offering too much kind of choice with a very, very genuine need, particularly if you've offered something and then it feels like it's been taken away? A couple of things I would say. We're not taking it away. So the exposure is still 70 % equity. So it's still a pretty growthy fund. We may play around with that 70-30 kind of mix. We've modelled different things. The difference in return isn't that great in terms of expected return.

48:06And expected return is completely different from what the actual return is. But it does, we're trying to find a sweet spot. I think it's pretty high. 70-30 versus 100 % equity. If you model that over the last 100 years, it's going to be a couple of percent a year. You couldn't model this over 100 years. Wow. Because this is like a really, really, really narrow, narrow kind of fund. You'd need... Most of the companies are in that kind of fund when they're 100 years. Not the Sharia. I mean, if you take 100 % global equity, so the whole market, and you add a 30 % bond allocation to that, and you run that for 40 years, the 100 % equity past performance is no guarantee of future returns but the 100 % equity would outperform the 70-30.

48:50If you put in one pound 100 years ago yeah but that's not the way our members work so our members will be putting money in at all sorts of different times and stuff so there's a pound cost averaging kind of thing here um when we've modeled the difference between the Sharia fund expect return and a 70-30 is pretty marginal over about 10-15 years um it's not it's not as big is as you can do like those kind of sort of big big studies and take the kind of barclays um or the dims and marsh kind of studies and map it over 100 years it's not that big but that is a kind of a slightly separate separate issue we still think this will be a high returning fund compared to it was your highest returning wasn't it by by quite a stretch yeah so like if that's 100 % equity the default is that more more closely 70 30 um so the default it depends where you are because you've got 50 50 50 different different funds and it is changing all the time so we have um so we have an aim to try and get 30 of our assets in the default strategy into private markets so at the moment we're at about 15 and it's quite hard because because we've got all this money coming in and deploying into private markets is harder than deploying into developed markets because you've got to find find the opportunities because you're so big is it easy to make changes and how often do you make changes like to your funds or like to your outlook or research and things yeah so because we've got the default fund we've got these target date funds these 50 target date funds it's really really easy to kind of plug and plug in kind of new asset classes or new fund managers without having to change anything at the top level so we have it's called like a fund to fund structure so you might be in the 2040 retirement date fund and that's what you see and you'll see you know the return you get and you'll see what the asset allocation is but that will be feeding into we've got some second level building blocks which then feed into the individual asset classes um so we can make changes a lot easier than more traditional kind of deep dc um can which is great the evolution of our approach since we started investing in 2011 2011 we started off with five basic building blocks we had a passive global equity we had a couple of guilt funds we had this diversified growth fund um and that was it and we were trying to maximize can return and minimize risk with those and it was a 60 broadly speaking about 60-40 strategy for some of those funds.

51:23Every single year since 2011, because we've got more money, we've been able to make it more sophisticated. And now we're at the stage where we're adding in kind of private equity funds all over the place. We've just added in timberland. That's a new asset class. We're investing in kind of forestry in the US and things like that. These are all alternative sources of return. And the aim, I mean, the whole point of kind of diversification is not just spread it out it's to try and kind of reduce correlations in different economic cycles and what we what we don't want is we did really well in like you know 10 year tech boom but then we did terribly afterwards we want to find growth in all different kind of economic cycles which means bitcoin we've had conversations about bitcoin and that's not where we're going at the moment yeah you probably missed it at the time of recording great to it to crash and pile in yeah little one percent of assets would do something naughty wouldn't it to the price of bitcoin i'd imagine there's uh yeah we are we're not quite there yet with with bitcoin it's something we we keep under review there's going to be a lot of people listening to this that'll be like for one of the biggest pension companies in the uk to say we're not quite there yet and not to just spit on the floor i think they'll probably take that as bullish so yeah i completely get your approach and i completely get that like you've got your hands on this huge pot of money that you've got to steer around and and i really like the fact that you're taking like a canadian approach where you're buying assets and going out there and using that power to pick up things um you know because i think one criticism of pension in the past it was just like gordon brown changed it it was all slapped into bonds and it was pretty disastrous for returns for certain people the sharia thing though these these people that they want 100 % equities do you not think the easy thing to do is just to give it to them yeah it's definitely something that we're we've got on our kind of like our list of things what should we do and we've been talking about this on and off the last 10 or 11 years um the kind of concept that we've talked about is should we give people some access to underlying building blocks and allow people to um either have 100 % equity then we might white label it or mix and match together we've just got to like you know we're doing a lot and we're trying to do a lot in um in quite a short period of time and a big focus at the moment is on how we can support people for retirement so it's definitely there in the mix of the things that we might want to do um i can't give you a kind of like this will be in place in six months or 12 months or 18 months or something like that but it's definitely something on our list of things that that we should be really thinking hard about whether we should do um and the kind of feedback that we've got i mean it's great i mean i understand that people are upset about it and and some of the some of the feedback is why have you done this and things when we surveyed people before it was like are you happy with fun choice do you want anything else do you want an all equity strategy do you want this nobody was interested in it and things so so it's kind of but these are like the very engaged people who probably like they invest themselves they can't get their money into a sip because you don't allow partial transfer so they're just looking for the most risk on approach for them and it's like i you know you ask someone in the street they're not even going to know what investing are but these are a handful of people that are really into it yeah you know and it's not that they're not a priority yeah but we have to kind of like balance kind of priorities about um where we put hopefully it's a little bit bitcoin definitely but yeah but yeah it's it's a complete it's a really really legitimate kind of challenge and we're not ducking it whether or not we conclude this is a good use of our resources and and changing um elements of the scheme administration that's you know that's something we've got to work through um but yeah we've definitely heard that people want 100 equity do you think like could you give them a timeline at all no and do you how much how how hard is it to just implement 100 equity strategy into your fund lineup there's a lot of change it's less um It's straightforward from an investment perspective because we've got the building blocks, but there's changes to the scheme administration.

55:30And as you can imagine, we work with nearly a million employers. We work with 13 million members. We have all of these connectors and stuff. It is an enormous operation, making sure that all the money, I mean, money's coming in every single day, making sure it's in the right accounts and the communications are working well. So making any changes to that is not non-trivial. it's it's you know you have to think hard about what you're doing and why you're doing it and the cost of making changes and how does that kind of fit with kind of wider kind of member needs so i'm not saying we're not going to do it i'm just saying it's not a thing that i can come on here and say yeah yeah we'll do this and you know would nest's like overall view be that people should be able to have agency and control over their pension like you said before um i think our view is we want people to be engaged we want people to trust us, I think that's really important and for trust people need to know that we exist and things that's why it's good that you're here yeah, thank you and we want people to think that we're on their side we have a nervousness so if you look at kind of international studies when people do a lot of self-selecting themselves Bells.

56:50people can get themselves into trouble and there has been tendencies of you know the kind of you know you you buy at the top and you sell at the bottom. And if you're reading in the FT, you're already five days too late. A lot of studies in Australia where people doing self-select have done really, really badly. That might just be bad products and things. That could be individual companies. It could be different funds. You don't know. You've only got like six funds, right? So there's limits. There's a lot of guardrails there. If you go from 100 % equity to a 70-30, it's not like that. And that's why the guardrails are there.