Eight million savers into Nest workplace pensions, the government auto-enrolment provider, will soon have some of their pots invested in socially responsible loans – funding wind farms to social housing – in plans to boost their retirement savings.
Hard for ordinary investors to access, private credit investments – essentially loans – are not traded on a public exchange or market, but are directly negotiated between large investors and the loan’s recipient.
Returns can be higher as investors have to tie up their money for the longer-term until the loan matures, in what is known as an ‘illiquidity premium’.
As well as growing savers’ pots, according to Nest the new strategy will mean it has a direct link to the companies it invests in, making it easier to demand environmental, social and good governance (ESG) criteria in its selection of the loans.
These will include financing of solar panel and wind farms, environmentally-conscious infrastructure, social housing, and sustainable real estate such as carbon-neutral buildings.
Speaking at an event in London, Mark Fawcett, Nest’s chief investment officer, said: “What we see in private credit is some real opportunities to invest for ESG. We need private capital investing in renewables to ensure that shift happens.
“We choose our managers on the basis of ESG and have failed managers based on that.”
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Rules coming into force in October mean pension schemes with more than 100 members must explicitly disclose the risks of their investments, including those related to ESG. Pension minister Guy Opperman has repeatedly said he wants schemes to find ways to invest more responsibly.
Amundi and BlackRock are the first asset managers Nest has chosen to run its new strategy, out of nearly 40 organisations that applied. They will focus on global real estate debt and global infrastructure debt, respectively.
Thierry Vallière, head of private debt at Amundi, said at the event: “The ESG criteria is really core in our investment decisions and has been part of our strategy since inception 10 years ago.
“We first look at the environmental and social aspect of a building, then the carbon aspect. It’s really important.”
Nest has set an initial target of investing about 5pc of its £7.5bn of assets in private credit, which it will build up slowly with up to £500m in the next 12-months from October.
High-profile problems with illiquid investments dominated investment news over the summer, as Neil Woodford was forced to suspend his £4.3bn Woodford Equity Income fund because it was unable to keep up with investor demands for their money back, after a run of poor performance and concern over the amount the fund held in illiquid assets.
Stephen O’Neil, head of private markets at Nest, said he wanted to reassure pension savers they will not face a similar fate.
He said: “We’ll be careful to manage our exposure to illiquids so that while they’ll play an important role in our portfolio, it won’t be a dominant one. Our positive cash-flows will ensure members retain the ability to move their savings around.”
Older savers with Nest who are approaching retirement will not be invested in private credit, only those who are investing for the long-term.
Forecasts put Nest as having £20bn of assets under management by 2022 and by the late 2020s, one third of the working population is expected to have a pension pot with Nest.
Mr O’Neill said the size and long-term nature of the scheme means it can give savers access to investments they are unable to gain as individuals.
He said:“Nest’s size and future growth helps negotiate great deals with fund managers, meaning our members can grasp with both hands the opportunities presented by private credit.
“We’re long-term investors – our youngest member is just 16 and she could be investing with us for more than 50 years. She’s the perfect person to be entering into private markets. We can be patient with her investments so she’ll benefit from the illiquidity premium you get with these types of loans.”
A consultation by the Department for Work and Pensions in February, Investment Innovation and Future Consolidation, encouraged defined contribution (DC) pension schemes to consider investing in illiquid assets.
It said: “By investing almost wholly in highly liquid investments such as publicly-listed equity and debt, beneficiaries can miss out on the illiquidity premium which results from being invested for the long term”.
Nest’s move into private credit coincides with its creation of a subsidiary company, Nest Invest, which has applied to the FCA for authorisation as a regulated investment firm, so it can secure co-investments in private markets.
Authorisation will mean it can undertake investment management on behalf of a trustee or pension scheme and have the ability to manage more complex investment decisions. A similar model is used by RBS and BT.