NEST's reliance on gilts to provide steady growth in its default fund will leave many of the most vulnerable savers with the lowest income exposed to inflation, No Monkey Business (NMB) warns.
NEST's default fund, which people will be opted into unless they actively choose another fund, will contain a mix of global equities, UK gilts, UK index-linked fixed interest, low risk cash management and diversified beta vehicles.
Last week, NEST Corp chief investment officer Mark Fawcett revealed plans to invest members' money in three stages; a lower risk foundation stage, followed by a higher risk consolidation stage for the middle section of investors' careers, and finally a low risk consolidation stage.
Fawcett argues a loss during the first few years of saving into NEST runs the risk of spooking members and causing them to opt out, defeating the purpose of auto-enrolment.
However, Stuart Fowler, investment director at advisory firm NMB, says the reasoning behind the lack of investment in equities in the foundation stage has not been argued effectively by NEST Corp.
He claims using conventional gilts during the low risk stages is "a mistake" as these assets will be hit by inflation, damaging the value of the savings.
"The massive impact of inflation will simply replace equity volatility and a mistake like this would undo all the good work of ‘lifestyling' and keeping costs low," says Fowler.
"The state of the art for this type of investment architecture is Liability Driven Investing, not the outmoded ‘balanced management' approach, with its excessive reliance on correlations between different asset classes."
However, Fawcett says: "NEST is very aware of the risks of inflation.
"One of the recommendations that came out of our investment consultation was our investment objective should be focused on beating inflation because that is very important for our members.
"The Trustees are considering the investment strategy at the moment and the issue of inflation risk is at the top of their agenda."
Partner Insight: Flora Maudsley-Barton, managing director of Parsonage Financial and Kerry Nelson, managing director of Nexus Financial met in London recently to discuss decumulation.
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