Strategy & Operations » What makes a good pension investment strategy?

In the last 18 months, the UK has experienced a Brexit referendum, the appointment of a new prime minister, the triggering of Article 50 to leave the European Union, a General Election in which the government lost its majority, and the beginning of critical negotiations with the EU on trade, citizens’ rights and financial contributions post-Brexit. This has all been amid a Trump presidency, European elections, and an unpredictable global economic climate.

It’s no surprise then that the political and economic uncertainty generated by the past months has filtered down to the pension industry, with pension managers questioning what this all means for their schemes.

Key issues affecting the pension sector this year have included continued market uncertainty, the roll out of auto-enrolment, and an ageing population with insufficient pension funds to see them through retirement.

So, in 2017, faced with these challenges, what does a good pension investment strategy look like?

Long-term perspective

Firstly, a long-term perspective underpins a responsible pension strategy.

There can be a tendency within the financial services industry to focus on short term returns and obsess about every twist and turn of the market. That may make sense for investors with short term horizons. But what most pension savers need is an assurance that their money will grow in value, above inflation, over 20, 30 or 40 years and will be there for them at the end of their working life.

Quarter on quarter returns are a distraction for pension schemes. The focus should be on whether they’re meeting their stated objectives over a much longer time horizon. Research and evidence from across the world confirms that one of the key drivers of good long term outperformance is what’s called “mission clarity” – clear objectives of what the long term goal is, and a set of guiding principles for how to get there.

Take the scheme’s approach to risk for example. Risk is a pre-requisite for return, but that doesn’t mean that good long term performance is gained by putting all a scheme’s assets in the riskiest investments and hoping for the best. An approach like that will create a lottery between winners and losers, and could lead to very poor outcomes. Even those who ultimately “win” may have lost a lot of value along the way, because it costs more to reach a big high if you’re trying to get there from a deep low.

That’s why prudent risk management is more likely to lead to more efficient and more consistent long term outperformance. Research conducted by NEST, the workplace pension scheme set up by government, also found that this approach fits better with what pension savers want most – certainty and security. The scheme’s approach has therefore been to refrain from taking undue risk with members’ money, and instead adopt long-term pension investment planning with a focus on risk-based asset allocation to drive performance.

But, what other attributes should a good pension investment strategy possess to achieve pension management success?

In-house investment team

One decision for pension schemes to take is whether to outsource the investment decision making or to create and develop an in-house investment team with responsibility for the investment strategy. Cost is often an important factor behind outsourcing. Providers need to know what’s most cost effective when it comes to build/buy decisions. Inability to attract the right talent can also force providers to look for external support.

Yet, there’s a strong argument for bringing responsibility for the investment strategy in-house. Academic evidence shows that asset allocation decisions are the most important drivers of differing returns. By having an in-house team, pension providers can ensure that the most important investment decisions are being implemented solely in the interests of scheme members,  and that strategic decisions are adhered to. Decisions can be made quickly and effectively, and performance can be frequently monitored.

NEST is one example of a pension scheme that has implemented an effective in-house team. The team includes an economist, financial modellers, and asset allocation and risk management specialists, with decades of investment experience between them. The breadth of the team ensures that the economic and investment environment is fully understood, while member funds are managed in accordance to the pension scheme’s stated principles.


With numerous pension schemes in existence in the UK, many find challenges of scale an obstacle to pension returns. Limited scale may drive higher costs, insufficient resources and reduced benefits for members.

In comparison, funds with the benefit of scale can often provide better member outcomes by keeping charges low. They are also able to offer a level of tailoring and flexibility even when catering for large, mostly unengaged memberships.

Auto-enrolment means millions of savers are joining pension schemes with very little personal input or engagement. But the default funds they’re enrolled into can’t simply be big one-size-fits all warehouses. Meeting the majority of members’ needs requires a level of tailoring and sophistication that can be hard to achieve without the scale to provide innovative solutions. NEST’s solution for example offers a default fund for every year a member might retire, which is risk managed according to the age of the members in the fund and how close they are to retirement.

There’ll also be some members who’ll want something different from the default fund, but again evidence shows that those choices are hard to get right. Pension schemes that offer an unlimited array of options are not necessarily giving members what they need and are likely to be adding unnecessary cost. A targeted and appropriate range of no more than five or six alternative options is proven to empower members the most.

Final thoughts

In the wake of the recent BHS pension scandal, pension governance and good pension investment strategy is high on the agenda. While strategy and investment decisions will vary according to company or scheme, having a long-term perspective, in-house investment team and scale capabilities are core foundations to building a good pension investment strategy, and one that is most likely to deliver returns for members.

With political and economic uncertainty likely to continue throughout the Brexit negotiation period and beyond, and with individuals rightly concerned about being able to safeguard money for their future, now is the time for pension investors to attach renewed importance to the long-term sustainability of pensions.

Find out more about NEST’s pension investment strategy, and discover how you can offer a better retirement outcome for your workforce.

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