Is Britain’s biggest pension scheme any good?

If you have a workplace pension, it’s likely your money is controlled by a company called “Nest”. This stands for “National Employment Savings Trust”, which is a government-backed pension scheme. 

More than 11 million workers save into this “defined contribution” pension scheme, which invests your money in a mix of stocks and bonds, so that eventually your pot can grow big enough to fund your retirement. 

The Government set up the Nest scheme in the early 2010s to help deliver its “auto-enrolment” programme. This means Nest has a “public service obligation”, like the BBC or NHS, to make sure every British employer has access to a high quality workplace pension. 

But is Nest any good? There is stiff competition from rival providers such as Now Pensions and The People’s Pension.

More people are also turning to self-invested personal pensions, or “Sipps”, a type of investment account which gives you complete control over how your retirement savings are invested. 

Here, Telegraph Money breaks down how the £33bn Nest fund has performed so far, how its bosses decide where to invest your retirement savings and how its fees work. 

How does Nest compare with other pension funds?

Unless you make an active decision about where your money is invested, your Nest pension will be invested in a “default” fund. The returns your savings achieve will vary according to your age, as the funds with a later target retirement year will take on riskier investments. 

This could mean higher returns when the market is doing well, but much lower or even negative returns when it is going through a downturn. 

Nest approaches this through four different stages. The first is the “Foundation” phase, where in a saver’s early twenties the fund will focus on steady growth and avoiding sharp losses of money. 

This is designed to help younger members to get into the habit of saving regularly and not being spooked by market falls, although critics have suggested that avoiding risk at this early stage of an investment journey risks missing out on possible returns.

The second is the “Growth” phase, when Nest will focus on growing your money as much as possible from your mid-twenties and older. The official target is to beat inflation and to add at least an additional three percentage points to your savings, after charges. 

For example, if you had £1,500 saved with Nest, after 10 years in the growth phase it would try to grow that to £2,495, even without any top ups.

The third phase is “Consolidation”, around ten years before you expect to retire and when your money will start to move out of higher risk markets. Nest will still try to keep your money rising in line with inflation, but there likely will not be any big jumps in value from this point.

Finally is the ‘Post-Retirement’ phase. If you have less than £10,000 saved, you will be moved into the Nest Post Retirement Fund, which is designed to be a temporary holding place in low risk investments. 

If you have more than £10,000, it will be moved into the Nest Guided Retirement Fund. This allows you to stay invested and still be able to access your money.

Nest’s default funds have kept pace with rivals, delivering some strong returns over the long-term.

Its Sharia fund has outperformed its rival from the People’s Pension. Its Ethical Growth fund has performed slightly worse than its rival, but the Nest 2040 Retirement Plan has beaten some of its peers by a wide margin.

The fund has delivered returns of 113pc in the past decade, compared with a 61pc return from Now Pensions’ Diversified Growth fund and The People’s pension Pre-Retirement Plan, according to the data provider FE Fundinfo. 

If you are unhappy with the way your pension is performing, you can ask to move your money within Nest. For example, the Sharia fund is the best performing part of the pension scheme. 

This is a fund that only invests in Sharia-compliant company shares and corporate bonds. It takes an investment approach based on Islamic law, which means that it cannot invest any money in businesses that make money from interest payments. It’s a riskier fund than the rest of Nest, but so far it has vastly outperformed the rest of the fund. 

Most of the fund is invested in technology stocks such as Apple and Microsoft, which have been the main driver behind stock market returns for the best part of the last decade. 

The ethical fund is for people who want to invest in line with specific ethical or moral concerns, for example in areas such as human rights and fair trade. 

Meanwhile, Nest’s “higher risk” fund is for people who are comfortable with taking more risk in expectation that their pot could grow faster. 

You can also opt out of your workplace pension and opt for a “Self invested personal pension” or Sipp instead, but this might mean you miss out on contributions from your employer. 

In this type of pension you can pick your own investments, including other types of retirement funds from different pension providers. You can read our guide on how to pick a Sipp provider here.

How does Nest make its investment decisions?

Nest has an in-house team of investment experts that decide how your retirement savings are put to work in the market. They will also appoint professional fund managers to invest in certain areas, such as energy.

You may not agree with all of the investment decisions that Nest makes on your behalf. For example, the pension scheme drew scrutiny in 2021 when it sold its investments in ExxonMobil, the American oil company. 

But Mark Fawcett, who is in charge of Nest’s investment team, said the pension scheme does not have a “divestment” policy when it comes to fossil fuels. 

“You can’t divest your way to net zero, you have to take the world with you,” he said. 

“What we are doing is engaging in companies to encourage them to stop drilling and searching for new oil and gas. We don’t think the world needs it and there is a big risk of having stranded assets. 

“We have divested when companies refuse to engage and don’t have a clear transition plan.” 

“But we also invest a lot in renewables. For example, we have invested in Hornsea wind farms. We are slightly on the fence around nuclear as we need to keep generating electricity with nuclear stations but investing in new nuclear is very high risk because of how expensive it is. 

“Solar, on the other hand, is now one of the cheapest ways to generate electricity.” 

As well as investing in “green” projects, Nest was also one of the pension schemes to sign up to the so-called Mansion House compact last year, a voluntary agreement with the Chancellor to invest in private assets in Britain. 

However, there have been some concerns around how this could affect savers’ returns, as private equity funds notoriously charge high management and performance fees, often in the “two and twenty” arrangement. 

This refers to a 2pc annual management fee, and to a performance fee of 20pc of profits made by the fund above a predetermined benchmark. 

“We think the manager takes more of the benefit than the saver or investor, and that isn’t fair,” Mr Fawcett said. “We already have some partners in the private equity space where we have negotiated better deals, where we get a fairer split of returns.

“But outside of the two great partners we already work with, once we explain to private equity firms that we are not going to pay carried interest, most of them go away quite quickly.”

However, Mr Fawcett added that Nest was keen to invest more in British growth companies that were not listed on the public market. “We are looking for opportunities in British growth, we view it as a win-win for us as investing in these companies will help generate jobs, and they could then become members of Nest. We would be investing in them and for them.

“If the LSE can attract good tech to the UK stock market we would consider that too, but it’s not our job to push up UK equities.” 

How much does Nest cost? 

Nest charges the same fees across all of its funds. They stay the same even if you stop contributing and no matter how much you have saved.

The fees are made up of two parts. The first is a “contribution charge” of 1.8pc on each new contribution into your pot. The rest is an “annual management charge”, or “AMC”, of 0.3pc on the total value of your pot each year. 

For example, if you paid £1,000 into your pension, your contribution charge that year would be £18. If your pot was then worth £10,000, you’d pay an annual management charge of £30. Overall, you’d pay £48 in fees that year, which is around 0.5pc of the total value of your pension pot. 

These fee costs do add up after a few years, but they remain a relatively low portion of your overall retirement savings.