Nest, one of the UK’s largest workplace pension schemes with 10m members, is planning an aggressive push into private markets which could “comfortably” exceed a fifth of its entire £13bn investment portfolio.
Nest has about 9 per cent in private markets, including 6 per cent in private credit, with the remainder in direct commercial real estate.
By the first quarter of next year, it aims to raise its private market holdings to about 15 per cent by expanding its equity stakes in infrastructure.
“We believe Nest can comfortably accommodate 20 per cent or more in private/illiquid investments, from a liquidity risk perspective,” said Stephen O’Neill, Nest’s head of private markets. “We see value in these assets for our members.”
Nest’s ramping up of its illiquid holdings comes as private-sector pension funds in the UK face growing political pressure to direct more of their cash to infrastructure investment, such as roads and bridges.
Last year, the Treasury said there was a “huge” opportunity for pension funds to support the UK’s infrastructure investment ambitions. At the same time, the government made changes to make it easier for pension funds to invest in a wider range of typically more expensive illiquid assets, including loosening a fee cap on workplace pension charges.
Nest is a not for profit servicing private-sector employers and workers that is also supported by a £780m taxpayer-backed loan.
Mr O’Neill added that as the cost of investing comes down, and its asset base rises, the scheme may look to allocate more to illiquid assets, including private equity.
“However, we have to balance the attractive risk/return profile of these investments against their being more expensive in terms of fees,” said Mr O’Neill.
“Nest, like most UK defined contribution schemes, operates under a very tight fee budget.”
UK defined contribution pension schemes on average hold 4.3 per cent of their portfolios in illiquid and/or alternative assets, according to a 2019 analysis by the Pensions Policy Institute.
Nest said the government had not asked it to invest in UK infrastructure, adding its investment strategy was “completely independent”.
Nest — formed by the government in 2010 with a mandate to take on employers who may have been rejected by other providers — has about £100m of UK infrastructure assets including commercial real estate, warehouses and social housing.
Amin Rajan, chief executive of Create-Research, a fund management consultancy, said Nest’s ambitions for private market may look aggressive compared with other DC schemes, but its plans suited the liability profile of its younger membership.
“There is quite a lot of interest in infrastructure and real estate and other long-term investments because these investments generate a regular cash flow, provide inflation protection and offer safety characteristics such as guarantees and back stops,” said Mr Amin.
However, Mr Amin cautioned that while private equity and infrastructure may yield higher returns over time this did not mean the investments “were safe”.