Nest – Interview


happened in practice. This could change when the pensions dashboard arrives and people have the information on fund val- uation to hand. For most schemes, where the payroll runs on a single day, you know when the cash is coming in and you can plan ahead so you do not need daily liquidity. We have cash coming in every day of the week, which creates a challenge.


A privileged position to be in?


It is, but we want to put the money to work as soon as possible. The alternative would be having a dealing day once a week so we would only need to price weekly. But then some poor person’s cash just sits there for a week, which is not great. With hindsight, defined contribu- tion should not have been set up with daily pricing. But we are where we are and going back is quite difficult.


Could the requirement for daily pricing in DC be abandoned at some point? I think we will always have it. We have to ensure that we are giving people a fair price for the contributions they make. But I do not believe that the need for daily pricing and illiquids are entirely incom- patible. The two can sit next to each other, you just need to balance it. We have done some modelling on the level of illiquid assets we can hold, even for retirees. We do not hold illiquids, except for


listed property in our post


retirement funds currently, but we could also put listed infrastructure or short-dated private credit in those funds. Even at 67, someone has the potential to save for another 10 to 15 years, so sticking them completely in government bonds and cash is not a good way to achieve that. Of course, you need to do it cautiously, which we could do because of our cashflows.


The main issue is to avoid being a forced seller. We need to find a level where we can recycle assets between generations so everyone can benefit.


You are not the only scheme looking into this. The Royal Mail’s retirement plan is too. And USS is already doing it. Their idea is that if the DC scheme needed to sell cer- tain assets the DB scheme might like to buy them. So the DB scheme could pro- vide liquidity to the DC one.


You don’t have a DB scheme to sell assets to, so couldn’t the retirement stage default fund transfer less-liquid assets to the growth-oriented default fund and vice versa? We are a scheme which needs to invest around £400m of member contributions a month. We, therefore, do not need to sell assets on the open market. We already transfer assets across Nest’s target date funds, minimising transaction costs. Nest is considering how to best incorpo- rate


illiquids members.


If we invest our members in infrastruc- ture and private equity early in their sav- ings journey, when they can be most patient, we can maximise the compound- ing benefit generated from holding these assets for the long term. We have cash coming into all stages of the


You have around £400m of cash coming in each month. It must be quite a challenge to deploy that. The


efficient portfolio mandate was There is no


evidence yet that the wage-price spiral everyone seems to be worried about is happening.


created to prevent us from sitting on large amounts of cash, cash which is not earn- ing a return while waiting to be invested. Using that efficient portfolio mandate, we can equitise the cash whilst it is waiting to be put into real infrastructure, private equity or another strategy, so that helps.


What can schemes do to avoid being a forced seller? This was certainly a lesson from the global financial crisis, when a lot of smaller endowments found themselves in trouble when the value of listed assets fell while private ones did not. You sud- denly have a lot of capital committed to private funds which you have to honour if they call it for new investments but you have no cash, so you end up having to sell more of your liquid assets at depressed prices.


That can become a negative spiral if you do not manage it well.


Issue 116 | September 2022 | portfolio institutional | 15 into the lifecycle of our


LIZ FERNANDO’S CV


December 2021 – Present Nest


Deputy chief investment officer


November 2020 – December 2021 Nest Head of long-term investment strategy


August 2012 – September 2020 USS Head of equities


January 2006 – August 2012 USS


Deputy chief investment officer, head of European equities


product, apart from post retirement, so we can match the incoming cashflow with potential sales of assets. We rarely have days where we have net outflows.


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