NEST Pensions Higher Risk Fund

Alexland

Unicorn_cottage wrote: »

Dunstonh I just looked at the brochure NEST provided. The Sharia fund seems to be doing best of all!

Its a classic mistake to look only at recent performance without considering the risk and volatility exposure.

Seriously - are you ok with your investments suddenly dropping say 50% (and sometimes you wonder if they will keep dropping to zero) every 10 years? You might be but it requires some soul searching.

Alex.

jamesd

NEST is normally a poor choice for extra contributions because the first thing they do is take fees of 1.8% from you. Then their ongoing charge of 0.3% a year. That initial charge has largely vanished in the broader market.

In fund investments risk doesn't mean what it does in normal life. In fund factsheets it means how much the fund went up or down in value over the last five years. A fund where the managers put the money in a bank and stole 10% of the money each year evenly spread out would be described as very low risk. A fund which invests in the UK stock market would normally be described as high risk because of its routine ups and downs even though the long term expected result is growing by 5% plus inflation minus fees.

If you don't change from the default your money will be put into what is called a target date fund (actually 50 of them) that for long periods invest money in ways that are normally wrong for your age. They falsely describe this as "taking the right investment risk on their behalf at different periods throughout their time saving" when what those funds really do is seriously harm your investment growth by taking too little risk. What these funds really do is:

1. waste the first five years which they call the foundation years by investing in low growth things. They do this because people get scared by the routine periodic drops and instead of explaining they use low growth investments.
2. then switch to what they call the growth phase for the time between then and ten years from the specified retirement age. During this time the money is in what is normally called a balanced managed fund, which is where most pensions put the money most of the time, unlike NEST. But they use an uncommonly low target for ups and downs, just 10-12% a year, so most of your money is still being invested inappropriately and worse than typical pension default funds.
3. in the ten years before expected retirement that they call the consolidation phase they start to gradually move the money back into even lower growth investments again, called gilts - UK government bonds. This time because they implicitly assume you haven't kept up with the times and plan to waste about half of the income potential by buying an annuity. At least they will no longer use the even worse choice for you, cash.

You're 43. For at least 15 years they will be hobbling you pension growth in their foundation and consolidation phases. That'd cover the years to 58. Since people commonly retire several years before state pension age, say 63 for you, you'd only have 5 years in their growth phase so your pension growth would be hobbled for three quarters of the time it's with them.

If they still operate as described in 2015 their default choice is to put your money into target date funds with 50 different target retirement years. That actually helps because it can reduce the amount in low growth choices compared to if you'd told them a retirement year.

Get out of that ill-conceived and very harmful mess as soon as you can. They should be ashamed of themselves for offering such a retirement damaging product.

You've mentioned two of their far better funds, Sharia and Higher Risk. Over the last five years the Sharia one has had greater ups and downs so the misleading European Securities and Markets Authority (ESMA) risk rating system says it is the higher risk - meaning ups and downs - of the two. John Kay recently provided a good description of the ESMA risk ratings in the Financial Times piece Risk, the retail investor and disastrous new rules.

The NEST Higher Risk Fund is a traditional balanced managed fund with what appears to be a higher equity proporrtion than in the rretirement date funds, accepting 17% volatility (drop in a bad year) and as of Septembr 2017 ESMA 9.4% annualised volatility. Believe the 17% not the ESMA one. It's a medium risk fund based on what it invests in. That's a poor choice for your age but less poor than the rest of their bad range of offerings. Given their limited options switching to this would be a good move for you and most of the rest of their customers. Unfortunately even if you choose this fund they will ignore your explicit choice (PDF) and start to switch to even lower risk investments once you're within ten years of any specified retirement age they have for you so they seem very determined to make you poorer in retirement. To stop this harm you'll need to set a retirement date far in the future so they don't ovrride your investment choice.

The NEST Sharia Fund is another better option than what you get if you do nothing. It has the advantage that currently it won't switch to low growth investments in the ten years before a provided retirement date but this could change without notification at any time. Target volatility is 22% and misleading ESMA last five years only volatility 11.9%.

Of the options at NEST, Sharia looks least bad and none look good for a person of your age and situatio.

Do stay in NEST to get the employer contributions. For other money consider a global equity tracker or Vanguard LifeStrategy fund with high equity percentage in some other pension.

jamesd

Alexland wrote: »

Its a classic mistake to look only at recent performance without considering the risk and volatility exposure.

Seriously - are you ok with your investments suddenly dropping say 50% (and sometimes you wonder if they will keep dropping to zero) every 10 years? You might be but it requires some soul searching.

That was really good advice [STRIKE]except that none of the NEST funds has[/STRIKE] though only the Sharia fund seems to have a realistic chance of a 50% drop. Their two highest volatility choices are:

1. Sharia, 22% target volatility, 11.9% ESMA.
2. Higher Risk 17% target, 9.4% ESMA. A balanced managed fund, maybe 40%-60% equities classification.

ESMA are for the five years to September 2017.

[STRIKE] You were probably misled by their fund naming into thinking that they offered a 100% equity tracker.[/STRIKE]

Their current statement is that the Sharia fund mirrors - tracks - the Dow Jones Islamic Titans 100 Index but that could change at any time. I'm not sure how they can realistically claim to have a 22% volatility target with that index.

jamesd

Thrugelmir wrote: »

Don't put money at risk that you cannot aford to lose

You must ignore that in any sensible retirement investing plan. Taking investment risk is the only way to achieve sensible retirement goals at tolerable cost. Consider the final value of £100 a month for 15 years into a pension after tax relief in three options:

1. £18,000. Risk-free savings account that matches inflation (0% real interest).
2. £23,628. NEST Higher Risk (roughly 3.5%)
3. £25,641. Global equity tracker, maybe NEST Sharia (4.5%)

All values in today's money terms.

You're relatively old, the extra compounding time increases the compounded investment growth difference for a person who's younger or retiring later.

badmemory

What will eventually need to be addressed is that auto enrollment will not provide sufficient income in retirement for anyone unless full contributions start at 16. When a total of 8%, and in many cases not even of the full income, is the highest contribution rate, many are going to think they are making provision for their old age (after all the gov says they are) & they are going to be seriously disappointed. Their employers are not going to tell them that their pathetic 3% is indeed pathetic & that if they only started at 40 their contribution needs to be more like 17% than 5%.

Auto enrollment - too little too late. Then, of course, you get the employers who enrol after 3 months, except no-one much ever works for them for over 3 months.

JoeCrystal

badmemory wrote: »

Their employers are not going to tell them that their pathetic 3% is indeed pathetic & that if they only started at 40 their contribution needs to be more like 17% than 5%..

I agreed with your comment in full. I am still bemused that my employer is proud to contribute above the minimum at 2%! Certainly not something to be proud of. Hopefully, the contribution rate will go up much further in the future.

Malthusian

jamesd wrote: »

That was really good advice except that none of the NEST funds has a realistic chance of a 50% drop.

The Sharia fund is 100% equities. Furthermore as it is an ethical fund it is likely to be higher volatility than a tracker fund.

As an example, the December 2014 factsheet shows 31% in technology companies, 25% in health care, 14% in consumer staples and 12% in energy. That suggests that falls significantly in excess of 50% may be possible.

The reason I haven't quoted a more recent factsheet is that NEST no longer appear to disclose to its investors how their funds are invested. The website says "To find out where this fund is invested and how it’s performing [sic], read the latest Quarterly investment report" but the quarterly report does not give you any information at all, just a chart showing "100% Sharia compliant equities".

5 year volatility figures are meaningless in the context of this discussion as there wasn't a proper 2008-style market crash in the last 5 years.

*edit* The Higher Risk fund is the least bad option for NEST investors who are taking a long-term view. It has 15% in property and 8.4% in fixed interest, but that is unlikely to damage returns too much.

The Sharia fund adds too much additional risk with no expectation of additional return. High returns always means high risk but the same isn't true the other way around.

zagfles

jamesd wrote: »

NEST is normally a poor choice for extra contributions because the first thing they do is take fees of 1.8% from you. Then their ongoing charge of 0.3% a year. That initial charge has largely vanished in the broader market.

A 1.8% initial charge and 0.3% annual is better value than zero initial charge and 0.5% annual, if the investment stays in for over 10 years.

jamesd

Malthusian wrote: »

The Sharia fund is 100% equities. Furthermore as it is an ethical fund it is likely to be higher volatility than a tracker fund.

It's a tracker, tracking the Dow Jones Islamic Titans 100 Index. At least according to their current description. That index is the 100 biggest global companies which pass its Sharia screen.

Malthusian wrote: »

5 year volatility figures are meaningless in the context of this discussion as there wasn't a proper 2008-style market crash in the last 5 years.

I agree, that's why I linked to John Kay's piece explaining how flawed the ESMA risk ratings that KIIDs are now required to give are.

Malthusian wrote: »

The Higher Risk fund is the least bad option for NEST investors who are taking a long-term view. It has 15% in property and 8.4% in fixed interest, but that is unlikely to damage returns too much.

The fund can vary the equity split and the most recent newsletter says it is currently overweight in equities. That overweight position is given as:

53.2% global developed equities
14.5% hybrid property (UK commercial properties)
13.2% climate aware global developed equities
8% emerging market debt
4% global listed property (firms owning properties)
3.4% global emerging market equities (economic weight)
3.3% global emerging market equities (ESG screened)
0.4% global high yield bonds

That looks like only 73.1% equities even when overweight in them. They don't seem to say what the lowest equity split is.

Malthusian wrote: »

The Sharia fund adds too much additional risk with no expectation of additional return.

A 100% global equity fund that holds the 100 largest global companies which pass the Sharia filter has substantially greater long term growth potential than a balanced managed fund that appears to have around a 73.1% equity even when overweight. Substantially greater returns than a balanced managed fund can be expected, perhaps 1% a year more.

The Sharia fund looks like the NEST fund with greatest long term growth potential and the medium equity balanced managed Higher Risk fund the next least bad. Given a free choice I'd reject them both but employees whose employer has chosen NEST don't have a free choice, just a least bad one.

jamesd

zagfles wrote: »

A 1.8% initial charge and 0.3% annual is better value than zero initial charge and 0.5% annual, if the investment stays in for over 10 years.

1.8 + 10 * 0.3 = 4.8%. 10 * 0.5% = 5% so even after allowing for lost growth I think you're right on that comparison.

About right if an expensive platform like HL with its 0.45% a year charge combined with a cheap global excluding UK tracker at 0.08% and UK tracker at 0.06% are used. Not sure I'd want to use an expensive place like HL for just cheap tracker funds, though.