DC pension scheme hands L&G task of building NEST

L&G beats rivals to mandate to run scheme’s 20% property allocation

The new government-backed defined contribution pension scheme has chosen Legal & General Investment Management to manage a 20% allocation to property. Legal & General is believed to have beaten rivals including SWIP and M&G Real Estate.

The National Employment Savings Trust (NEST) was set up to serve the UK population ahead of auto-enrollment to DC pension schemes, which was introduced on 1 October 2012.

NEST is now only £12m in size but is forecast to grow rapidly. Its chief investment officer, Mark Fawcett, says the scheme is “doubling in size every couple of months. We expect to grow at an extremely fast rate and to hit £1bn at some point in the next few years.”

The Pensions Policy Institute forecasts that NEST will reach £150bn in the 2030s. Legal & General Property MD Bill Hughes called the allocation “a sea-change in terms of being a significant commitment to real estate from auto-enrollment and defined contribution.”

 Fawcett said the high property allocation was down to a view that the asset class would give long-term, sustainable returns while also being attractive in the short-term, particularly relative to bonds.

“We have a model that takes into account long-term returns, volatility and correlations and shorter-term views on asset classes’ relative attractions,” he said. “We have an inflation-plus benchmark. We think government bonds are still overvalued and real estate is a diversifying asset class at sensible values.”

The fund’s allocation will change as NEST manages risk and adds new asset classes. Fawcett envisages adding other real assets, such as infrastructure and social housing.

NEST will invest via LGP’s Hybrid Property Fund (see panel), launched in 2011 to expressly target DC schemes. It manages £120m of assets for pension fund investors such as Standard Life and Fidelity.

NEST will invest new money in Hybrid as it rolls in. It already had a very small indirect exposure to listed property via a BlackRock diversified fund of funds, which it will retain.

Many providers fell at daily pricing hurdle

NEST’s target 20% real estate allocation was split into two mandates: global REITs and UK direct property, and daily pricing was a stipulation for both.

It will invest through LGP’s Hybrid Property Fund, which invests 70% in LGP’s UK Managed Property Fund and 30% in LGIM’s Global Real Estate Equity Index tracker fund.

The property industry has been pondering how to serve DC schemes that want daily liquidity when property is an inherently illiquid asset class.

Fawcett said there was enough interest from potential providers of daily liquidity for direct investing, but admitted that “some of the direct providers stumbled on that provision” – one factor that helped cut the first stage of the procurement process back to around 10 UK and overseas managers for the second stage.

He said liquidity had been important for NEST’s first big commitment to the asset class, “but if down the track we wanted to add another real asset class, we might say monthly liquidity is fine”.

Also, because the fund is expected to be cash positive for many years, it will have the option to manage liquidity by rebalancing internally, so should not need to sell often.