Here’s what we think of the Nest Ethical Fund pension – a government-owned pension scheme that invests according to the ethical values of its members.
The National Employment Savings Trust (Nest) was set up by the government in 2010 as part of its “automatic enrolment” retirement saving initiative designed to get millions more people paying into a pension. You can invest in a Nest pension if you are employed or self-employed. Nest currently manages more than £17.2 billion of UK pension savings, representing around a third of the UK workforce.
Its Ethical Fund, which Nest says is slightly higher risk than its standard fund (but has performed better over the last five years – see below), invests in companies with positive records on human rights, fair labour, fair trade, and the environment. It avoids investing in tobacco, arms and corrupt states, as well as companies with a bad human rights record, or that damage the environment.
Like all Nest pensions, its Ethical Fund is a ‘master trust’. This is a common type of defined contribution pension that has independent trustees who look after pension savings on behalf of the members. The major decisions are taken by the master trust, but your employer can still make decisions about contributions, investments, and benefits.
Once you become a Nest member, you can easily access and manage your pension through your personal online dashboard whenever you like. When you log in, you’ll see how much is currently in your pension pot, including a breakdown of how much you’ve put in and how much is from your employer, plus any tax relief on your contributions. There’s also an option to transfer your other pots into your Nest account.
You can see your current Nest retirement date, the fund you are currently invested in, choose who you would like to inherit your pension pot, and keep your contact details up to date.
It’s important to keep your employment and estimated retirement details as accurate as possible so Nest can manage your pension accordingly (it changes its investment strategy on your behalf the closer you get to retirement).
Sustainable investing option
Nest created the Ethical Fund to meet the values that are most important to its members. It looks to invest in well-run companies that have good control of their supply chain (and don’t use child labour), are creating solutions to issues such as climate change and biodiversity loss, and are taking steps to reduce their carbon footprint.
It also screens out companies that don’t follow human rights conventions or are involved with activities that harm the environment and society such as fossil fuels and weapons production.
However, some of the top 10 holdings might raise an eyebrow from those who aren’t keen on big tech companies. As of March 2021, more than 10 per cent of all the money going into shares was invested in Microsoft and Apple.
Unique selling points
- Most ethical funds only invest their members’ money in one particular market, such as shares or bonds. The Nest Ethical Fund is one of the only UK ethical options that invests in lots of different markets, which spreads the investment risk to you.
- It is also one of the only ethical options that invests in different markets at different stages of a members’ life. It automatically moves your money into appropriate investments when you reach certain anniversaries and get closer to retirement. The aim of this is to take the right amount of risk at the right time to help grow your pension pot in the earlier years and then protect it against potential losses as retirement gets nearer.
The plus points
- Nest’s Ethical Fund has brought consistently good returns since it was launched. In the five years to March 2021, it delivered a cumulative return of 74.5 per cent. Meanwhile, Nest’s default 2040 Retirement Fund returned 59.5 per cent and the Higher Risk Fund brought 72.4 per cent.
- If you are currently invested in one of Nest’s other funds, it’s easy – and free – for you to change to the Ethical Fund.
- As the Ethical Fund has a more concentrated portfolio (it’s pool of potential investments is smaller because of the ethical criteria they have to meet), it carries slightly higher risk than Nest’s other funds.
Cost of use
There are two charges for Nest members:
- A 0.3 per cent annual management charge.
- A 1.8 per cent charge on each contribution. This means that for every £50 you contribute, £49.10 is paid into your pension. This charge is in place to pay back the government loan used to set up Nest.
There are no charges for transferring pots into Nest.
How does this cost compare with competitors?
The Nest charges compare favourably to other ethical pension funds.
Aviva charges an annual management fee of 0.35 per cent for its ethical self-select pension, dropping to 0.25 per cent on pots over £200,000.
The PensionBee Future World fund charges 0.95 per cent for the first £100,000 of savings, then falling by increasing amounts. For the PensionBee Fossil Fuel Free plan, you’ll pay one annual fee between 0.50 per cent and 0.95 per cent, depending on the plan you choose. If your pension pot size is larger than £100,000 the fee will be halved on the portion of your savings over this amount.
Similar ethical pension funds worth considering are:
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Risk warning: Do remember that the value of an investment and the income generated from it can fall as well as rise and is not guaranteed. Therefore, you may not get back the amount originally invested and potentially risk total loss of capital.