NEST selects Legal & General to provide direct access to real estate

NEST (National Employment Savings Trust) has awarded Legal & General Investment Management (LGIM) two real estate mandates, representing its first direct investment into commercial property as part of its award winning investment strategy.

The new mandates allow NEST to further refine its sophisticated investment approach, providing enhanced access to an asset class capable of delivering long-term and sustainable growth for NEST scheme members.

NEST’s innovative target date fund structure and expected scale ensure that it can incorporate these mandates as part of a diversified and actively risk-managed approach, whilst maintaining its very low member charge. The combination of UK direct and global indirect funds provides greater diversification and liquidity, while reducing fund expenses and the entry and exit costs typically associated with direct property investment.

NEST led a highly competitive procurement process in order to select LGIM and its property platform, Legal & General Property (LGP), as the manager for its two real estate mandates. These new building blocks will make up a sizeable portion of the NEST Retirement Date Funds, as well as the NEST Higher Risk Fund and NEST Ethical Fund options.

Announcing the appointment, Mark Fawcett, chief investment officer at NEST, said: ‘We’re always searching for cost-efficient opportunities to access rewarded risk for our members. These new mandates, along with other building blocks we add in the future, continue to allow us to develop our award winning strategy.

‘Legal & General was chosen because it delivers on our demanding requirements for excellence in investment processes and philosophy, high quality risk management and a comprehensive integration of environmental, social and governance (ESG) factors. These elements give us confidence that we will continue to deliver strong and sustainable performance for NEST members.’

Bill Hughes, Managing Director of Legal & General Property, commented:

‘NEST is an industry-leading platform and likely to be one of the most significant participants in the UK pensions industry over the next decade, therefore we see this strategic decision to include direct property within its key building blocks as a major step forward for commercial real estate within the new world of DC pensions and a significant endorsement of our funds.

‘Offering an innovative and bespoke solution for DC schemes, our fund enables this growing market to gain access to property market returns, whilst also providing enhanced diversification and liquidity.’

NEST is working with more than 400 large employers for automatic enrolment and currently has over 250,000 members.

ENDS

Key facts about NEST Investment’s real estate procurement:

• NEST will be using two of LGIM’s unit linked real-estate pension funds.
• The Managed Property Fund (UK) invests directly in commercial property in the UK. This generates returns in two ways: income from rent, and capital appreciation (the market value of buildings increasing).
• The Global Real Estate Equity Index Fund invests in the shares of real estate companies around the world. A real estate company invests in a portfolio of property.
• It is anticipated that in the current market regime and economic environment, NEST will be investing approximately 20 per cent of growth phase portfolios into real estate. For a DC scheme, this is a relatively major allocation to real estate, which NEST expects will prove capable of delivering long-term sustainable growth for its members. This allocation will change through time as we dynamically manage the risk of portfolios and also as we add new asset classes.
• The two new funds represent the ninth and tenth underlying building blocks that are used for NEST Retirement Date Funds and NEST fund choices. NEST fund building blocks are all blended by NEST to create the NEST Retirement Funds.
• NEST will invest through Legal & General’s Hybrid Property Fund, which, launched in 2011, offers Defined Contribution (DC) Pension schemes with a new and innovative way to access property funds, while also managing volatility and liquidity. The Hybrid Fund invests in LGP’s UK balanced fund, the Managed Property Fund, and LGIM’s Global Real Estate Global Real Estate Equity Index tracker fund on a default position split of 70:30, respectively.
• NEST already accesses listed real estate via its diversified beta fund. Currently the exposure is a little less than 3 per cent in the growth phase of the NEST Retirement Funds. This latest procurement improves NEST’s overall access to the asset class, and provides greater flexibility for its active risk management approach.
• LGIM is at the cutting edge of integrating environmental sustainability into its direct real estate investment strategy. LGIM recognises the ever-increasing importance of sustainability in real estate construction and management in terms of generating long-term value for investors.
• LGIM takes an active ownership role in the companies whose shares it owns via the global listed real estate fund.
• Because of the Managed Property Fund’s sustainability characteristics, NEST has selected it to be a building block for the NEST Ethical Fund.
• There are 47 NEST Retirement Date Funds, a series of yearly target date funds, through which we will invest members’ contributions. Members will be enrolled into the fund that targets the year we expect them to want to take their money out of NEST.
• NEST was recently awarded Best DC Investment Initiative at the Engaged Investor Trustee Awards.

Key facts about NEST:

• The government is currently introducing reforms that mean employers will have to automatically enrol most of their workers into a workplace pension scheme that meets or exceeds certain standards. Employers also need to make a minimum contribution for many of these workers.
• NEST, which was established by statute as part of these reforms, is a trust-based defined contribution workplace pension scheme available to all employers to use to meet their new duties.
• NEST is designed around the needs of people who are largely new to pension saving, with clear communications, low charges and easy online tools and services. It is run as a trust-based scheme, on a not-for-profit basis, and the independent Trustee has a legal duty to act in its members’ interests.
• NEST has a public service obligation to accept any employer (whatever their size) who wants to use the scheme to meet their duties, as a sole scheme or alongside other provision.

www.nestpensions.org.uk