Private credit asked to feed growing Nest

As more of the world’s pension wealth heads towards defined contribution schemes, private markets managers will need to come up with solutions. John Bakie reports

The UK government’s defined contribution pension scheme, Nest, which provides a universal pension service to any employer in the country, wants to hear from innovative private credit managers about how its members can invest in the asset class.

Nest was created to support the government’s auto-enrolment rules, intended to boost private retirement savings, and has a large and rapidly expanding membership as more employees become auto-enrolled.

“We’ve spent the past 18 months plodding the pavement, meeting fund managers to see what the appetite is and what pricing points work”

Stephen O’Neill, senior investment analyst, Nest

In the year to March 2018, Nest membership expanded from 4.6 million people to 6.5 million. Its assets under management jumped from £1.7 billion ($2.3 billion; €1.9 billion) to £2.8 billion over the same period. The sheer number of members means Nest is rapidly becoming a major player in the pensions arena and could present a big opportunity to private debt managers which can come up with ways to make their product work for DC pension savers.

The decision to seek out private credit opportunities was taken as part of Nest’s longer-term work on providing access to private markets for its members.

“Private credit gives us an enhancement to our diversification and access to an illiquidity premium. While we’ve also been looking at infrastructure equity as a way to achieve this, private credit felt like it would provide the easiest route to entry for private markets initially,” says Stephen O’Neill, senior investment analyst at Nest.

He explains that Nest has now reached a point where it has regular cashflows to enable it to meet redemptions, meaning it can turn its attention to less liquid assets as it has no pressing need to generate liquidity within its portfolio.

However, Nest has some fairly specific demands for the industry in order to make a private debt allocation work for DC members.

“The solutions we want firstly have to be low cost,” says O’Neill. “We can’t pay carry due to the way fees have to be calculated for our charging cap, and we don’t think charging carry is warranted.”

Proposed solutions will also need to be able to scale with Nest as it grows. Private credit vehicles will need to grow with its default fund, which is where the vast majority of Nest’s assets are found. They will have to be evergreen, but Nest is open to discuss dealing and pricing frequency and will not be looking for daily pricing.

Nest will be allocating to private debt across four lots. The first will invest in US and European corporate loans, with two others focused on infrastructure debt and real estate debt and can take a fully global approach. The final lot will look at managers offering multi-strategy funds. Each lot can appoint one or many managers.

“We’ve spent the past 18 months plodding the pavement, meeting fund managers to see what the appetite is and what pricing points work,” says O’Neill. “It took a while before we were confident we were on the right track and could make this work, but now we’re very optimistic we will be able to get the right managers at the right price.”

He adds that private fund managers will need to think more about how they can make provisions for DC pensions in the future as many defined benefit schemes are no longer accepting new members and in the next 10-20 years an increasing share of pension pots will be in DC schemes.