Global Fiduciary Leaders with Elizabeth Fernando

Before joining NEST, Liz was head of equities at the university's superannuation scheme and had executive committee responsibility for the responsible investment activities.

Liz started her career as part of the portfolio management team at Lloyds Investment Managers, Before spending 25 years at USS, she's also an investment advisor to the British Coal Staff Superannuation Schemes Investment Subcommittee. Liz holds an MA degree in philosophy, politics, and economics from Oxford University, as well as an ASIP qualification from CFA UK.

She has passed CFA's investing and ESG certificate. Hi, Elizabeth. Welcome to the podcast. You are a respected investment leader in the UK and globally for your efforts at NEST, and you'll be speaking at our Global Fiduciary Symposium in Tokyo on November 11th during our Defined Contribution sessions.

Most people, at least outside of Japan, are not aware that Japan has implemented a DC system since 2001, when they introduced the Defined Contribution Pension Act of 2001. And essentially created both corporate DC plans and individual plans, which are now known as E DECO. The UK's NEST is relatively new compared with the UK's legacy system for many decades on DB plans.

So you naturally have a very important perspective to share with our audience on the growth and the importance of DC plans. So, to start, could you give us a brief history of NEST, how and why it began, and where it stands now, both in terms of total assets, and how it fits in and alongside the UK's other pension pots, as you say.

[00:02:16] Elizabeth Fernando: Yeah, absolutely. And first of all, thank you very much for inviting me to join you. It's, it's a real pleasure. So the background to NEST goes back to 2005 when the government realized that there was a looming retirement burden. Thank you. affordability problem and there was a real risk that pensioners were going to be living in poverty in old age because there were fewer and fewer workplace pensions that were being offered by corporates that a lot of corporates had closed their DB plans because they were becoming too expensive to manage.

And whilst a few had put DC plans in place to cover that shortfall, many employers had just decided to stop. offering pensions to their workers. So there was a cross party commission that looked at how to solve that problem, which resulted in a 2008 Pensions Act, which introduced the concept of auto enrolment.

So that was the idea, the requirement that every employer in the UK, whether you employ 10, 000 people or you just employ a nanny to look after your children, you had to offer your employees a workplace pension scheme. And NEST was established in 2010 to make sure that every employer in the UK could fulfill that legal obligation.

And we got our first contribution of 19 pounds in, in 2011.

[00:03:42] Chris Battaglia: Wow.

[00:03:43] Elizabeth Fernando: We now have over 43 billion pounds of assets under management. We're growing incredibly fasset. There's about 13, over 13 million members. Which is one in three of the UK working population. We have relationships with over a million employers.

So yeah, we are, part and parcel now of the fabric of the UK. Auto enrollment has been a huge success story, probably more so than anyone imagined when that Act passed in 2008. So back in 2008, less than half of workers had a pension in place. You roll forward to now and it's well over 75%.

[00:04:26] Chris Battaglia: Wow, that's tremendous progress.

[00:04:27] Elizabeth Fernando: Yeah, huge.

[00:04:29] Chris Battaglia: when you say you know, plans and employers, does that include sort of what we've referred to as the gig economy and, independent workers, or do they have a provision for nest as well? Or how, how does that work?

[00:04:42] Elizabeth Fernando: so it depends is the answer to that.

So if, for example, you're an Uber driver which in some countries that's viewed as self employed in the UK, that's been deemed that actually, no, you are an employee for all intents and purposes. And therefore Uber has to offer its drivers a workplace pension. If you're self employed in the UK.

there is no obligation to contribute to nest. It's up to you. If you want to, you can contribute to nest or to a personal pension, but that obligation doesn't exist. So the, there are still gaps in the system but there are fewer gaps than they used to be.

[00:05:20] Chris Battaglia: Well, it's certainly improved coverage over time.

So I know these things are hard to predict in terms of reforms, but since the UK has been proactive with reforms to assist society there. Do you think at some point in the future there'll be a compulsory contribution into a nest similar to the way, say, Australia has their, superannuation systems?

[00:05:42] Elizabeth Fernando: I honestly don't know. So there's a lot of conversation at the moment about how you bring the self employed into saving for themselves for their own retirement so that they don't have to fall back on state. We're probably on, on that spectrum of being tolerant of compulsion and completely allergic to compulsion.

And I'd put Americans on the completely allergic to compulsion end of that spectrum. I think the UK is somewhere in the middle. we generally don't like being told what to do, but we do eventually get with the program. I guess it's if they can find a mechanism, maybe attached to national insurance or the, personal taxation system, if they could find a way to make it administratively easy.

for those contributions to be made. I suspect it will happen if it requires a whole new infrassetructure. I suspect people will shy away from it. But this is way above my pay grade. So I'm speculating.

[00:06:40] Chris Battaglia: Now, I appreciate your insights. I think you said it very well in terms of being somewhere in the middle.

That's my view as well, is that us Americans are allergic to anything in terms of where the government is involved in being told what to do. Although we have some of the same mechanisms, obviously, in terms of auto escalation and auto enrollment and using a lot of the, you know, modern behavioral economic techniques that have helped our system.

But I think we're a laggard, I think everyone would agree in terms of coverage. That's where we have An issue. One of the things that really strikes me about nest is the extraordinarily well organized communication and governance and structure, as I would describe when I go to your website, I, you know, it's very clear to me that you've got it.

These three important pillars of an independent board and executive team and employers and members panel. And so you've got inputs from all the major stakeholders. I think our audience in the US and Japan would be very curious to know how nest is governed, how decisions are being made and which decisions are each of these, groups and stakeholders involved in, and how do they interact together?

[00:07:44] Elizabeth Fernando: Yeah, absolutely. And it's probably a shame that it's it's audio because people won't be able to see me waving my hands around as, as I try and explain this.

[00:07:51] Chris Battaglia: I can try to interpret.

[00:07:53] Elizabeth Fernando: So the overarching NEST Corporation board have responsibility for the member proposition, the purpose of NEST, the overarching investment objectives that we set, the product range that we offer members, and what we call the member journey.

So if you're in the default strategy, we run a target date fund model here. And the asset allocation shifts automatically behind the scenes for you as you approach retirement. the trustee board is responsible for that, that journey of how the asset allocation moves. Underneath that we have the it's currently called investment committee.

It's going to be renamed the nest invest board that includes some members of the trustee body but also some independent directors who have Investment expertise and investment operations expertise also has a few executives on it particularly one from Nest Corporation to maintain the relationship between the investment subsidiary and the parent group.

And that board is very much responsible for overseeing the investment function and operations, making sure that we're compliant that we've got the right culture and people and resources in place to run a sophisticated investment operation. They also approve the asset classes that we can invest in.

They set guidelines for the portfolios in terms of concentration, risk limits In terms of the cost budget that we have to operate within, the amount of illiquidity I can run in different portfolios, all of that sits with what will be the nest invest board. And then underneath that, we have the executive who are doing the day to day investment activities.

So, Asset allocation for the different funds, the rebalancing of those funds both on the member journey and to get back to the, asset allocation targets the hiring of managers, the evaluation of managers all of that happens within the executive function. So we've tried to make sure, and I think this is, one of those governance principles that people say are good practice.

You try and make sure that the decisions are being made by people with the right level of expertise. And the right cadence of, exposure to be best placed to use that responsibility and use it wisely. It's useless trying to make a trustee board who may have no investment background at all.

Take responsibility for whether or not you should be invested in Timberland and whether that exposure should be higher or lower this year than it was last year. They just don't have the level of expertise to make that judgment in a sensible manner.

[00:10:39] Chris Battaglia: Sure.

And you mentioned the other, the third bucket, I guess, being the members, right?

Yes,

[00:10:44] Elizabeth Fernando: yes, absolutely. And I forgot the member panel and the employers panel. We use them as a sounding board. So if we are thinking about changing the member journey, or we're thinking about changing the investment objectives, or changing the product range, we consult with the member panel with the employers panel as to their views on that.

And whilst they're not binding. we would be pretty daft not to listen to what they're saying to us.

[00:11:13] Chris Battaglia: To

your point about sophistication of investments and trustees, do you also solicit any kind of direct investment thoughts or guidance from them as well in a non specific way, like in terms of asset allocation and like, say, for example, you know, more illiquid strategies along liquid strategies and things like that, or, or those Things really reserve much more for the investment committee in terms of what you solicit feedback from the members.

[00:11:38] Elizabeth Fernando: So we tend not to ask the members at that level of granularity. Right. Because when we ask, when we do quite a lot of surveying of our members, in addition to what the member panel brings to us, but when we, when we ask people about their pension, a lot of people assume that we put the money in the bank.

And they say to us, we want something a bit like a bank account. We want something that's really safe. and when we tell them it's invested, they're a little bit taken aback and they're a bit frightened by that but we all know that putting your money in the bank and leaving it there is not the way to have a high quality retirement outcome, we tend to ask them more general questions about how do you think people would feel about something that looked a bit like this, or it had returns a bit like that. How do you think people would feel about it? Does this terminology work? for you.

[00:12:32] Chris Battaglia: Yeah, that makes sense. You know, you mentioned, you know, it's quite rapid growth, right?

So you're going to be celebrating, I think, your 15 year anniversary next year, right? 2025. Is that, is that right? Math right on that?

[00:12:43] Elizabeth Fernando: Yeah, it depends where you start counting from, I guess, when we took the first pound or when the firm was established. But over, over

[00:12:51] Chris Battaglia: 40 billion pounds sterling, and you have a lot of expertise.

In house, including yourself as chief investment officer. I'm curious to know to what extent do you outsource? do you use external gatekeepers and consultants? how does that process work? Or do you do mostly everything internally or only outsource, certain portions of your investment portfolio?

[00:13:14] Elizabeth Fernando: we've historically not heavily relied on consultants. the Nest Invest team is the advisor to the trustee board. so we have that responsibility as, as primary advisor to the board. In terms of day to day implementation, the internal team does the strategic asset allocation and makes rebalancing decisions.

We oversee the selection and monitoring of managers, so we have the hire and fire decisions. All of the implementation is externally managed, so we don't run any portfolios at the moment. Internally with an internal team in the way that a USS or some of the big Canadian plans have huge internal teams.

The Aussies have huge internal teams. We're not there yet on our journey. It may come because of, we know we're going to be 100 billion in 2030 ish. And no one is 100 billion pounds and fully outsourced. So it's likely we will start having an internal team as

[00:14:21] Chris Battaglia: well.

[00:14:21] Elizabeth Fernando: Yeah, it makes

[00:14:22] Chris Battaglia: sense. You know, I'm curious when you're looking at manager oversight, and this is the last question I have about sort of that part of the monitoring side of things, is it fairly typical of a pension scheme or a pension fund that if you have a certain strategy and allocation that isn't keeping up with the benchmark, or there's a performance gap, or a portfolio management team that all of a sudden just gets bought out or moves out, do you put them on watch?

Do you closely monitor them? how does that process work? And internally, is it typical?

[00:14:52] Elizabeth Fernando: I would say we are more patient than many. we have a belief that by building long term partnerships with our managers, we will get better outcomes for our members than if we're having a more transactional relationship with those external managers.

I think NEST I believe we've only parted company with two managers. Over the whole of our existence which I think is probably pretty unique. we tend to have very large, I, I, when I'm being unkind, I call them clunky building blocks. So our strategy is relatively straightforward.

We have an emerging markets equity manager, just the one. We have now two developed market equity managers. the strategy is relatively simple in that regard. We don't have hundreds of relationships. You can't quite count them on two hands, but two hands and your feet, you're probably covering most of our, partners.

And so that just gives us. I think it does make us much more long term. We're much more thoughtful about how we engage with people. A lot of the portfolio is systematic. So underperformance isn't really such a thing when you're in those systematic strategies. It's more index like but even with the active managers, we try to make sure we are being properly long term in that relationship.

And I've been a fund manager, I've run portfolios. You have periods when you do well and periods when you do badly. And you're not a genius in those periods when you're doing well and you're not a donkey in those periods when you're doing badly. You need to take the rough with the smooth and provided you have confidence in the people and the process.

[00:16:36] Chris Battaglia: yeah, great insights. I want to shift a little bit to, so, you've got a great success story in terms of coverage. The numbers are increasing, we're reaching more people, we're providing. I want to dig a little bit deeper under the engine in terms of how big the pots are getting and how they relate to other pension pots.

So you know, the U. S. and Japan both have a maximum contribution level to Their D. C. Plans, at least in in the U. S. In terms of maximum amounts that can be tax deferred in Japan is, as I mentioned in our sort of warm up sessions is in the early days of their contribution levels and are still quite low compared with the U.

S. And the U. K. What are the current guidelines for nest in terms of the minimum maximum contributions at nest and our members allowed to transfer other. Pension pots into NEST. I'd imagine the fees associated with those or with NEST, rather, could be quite lower than some of the other pots that members have.

And how are you encouraging the consolidation of someone's pension retirement pots, i. e. reducing costs for them over time? And what impact does this have on the future income stream for participants in retirement. I know there's a lot of questions there, but hopefully you get the context.

I had to give you some broader background for the context of the question.

[00:17:53] Elizabeth Fernando: Yeah, absolutely. So one of the challenges at the moment is we only see the pension contributions people have with us. So we don't know with a lot of certainty what other. savings they have. We do do a lot of research to try and, because we've got one in three of the working population, if you do samples of the working population, and the UK government does lots of statistics around this, we can build up patterns that we think might be true of our membership, but we don't know for sure.

So our members tend to be moderate to lower earners, which means we think that the state pension will be the largest element of their post retirement income, and NEST and other pensions that they have built up will be relatively small top ups on top of that. In terms of contributions, at the moment for NEST, Or across the UK, the minimum level of contribution for auto enrolment is 8%, which is 5 percent from the employee, 3 percent from the employer.

There has been chatter about those numbers moving up and a few other technical changes, which would mean that the contributions start from the first pound of earnings rather than at slightly higher level. Although there is a lot of agreement that 8 percent is too low, there's a lot of nervousness about increasing it at the moment because the UK, like everywhere else, has been through a cost of living crisis with inflation and energy prices, and wanting to avoid tipping people into problem debt because you're Putting more away for the long term isn't a sensible thing to do.

So there's agreement the rate needs to go up, but not when or how it, will go up. In terms of maximums, that comes through the tax system in terms of your, your annual allowance. And those rules are phenomenally complex. And yeah, I wouldn't even try and get into into numbers on that because it's even my accountant struggles with those, those rules.

So yeah, the rest of us, I think, are doomed if we try and try and talk about that.

[00:20:04] Chris Battaglia: That's universal. I think anywhere you go in the world you know, whether it's Japan, the US, tax issues and are just arcane and very, very complex. And what about the cost side? Right?

So, you, you also have managed to be. Expert on the investment side with high levels of sophistication and low cost the holy grail, if you will. how important is that going forward? And what kind of communication strategy do you have with members if any to help them sort of assess the cost side of the investment with the other pots that they may have as they're trying to think about consolidation?

Is that a factor?

[00:20:39] Elizabeth Fernando: Yeah, so being low cost High quality was really important to us. We're not for profit. So were loss making until last year when we finally turned profitable. Our scale really gives us great advantages and probably more important than our scale, our growth.

in AUM gives us huge advantages when we're negotiating with managers over fees or other service providers over fees. Our membership isn't terribly engaged. So we only have about a third, just over a third of the members of that 13 million members, only about a third have actually registered with our online portal.

For the rest, this is all happening behind the scenes and they may not even be aware they have a pension, nevermind that it's, with NEST. Which is, quite extraordinary. And so, communicating with members is, to encourage them to make changes for themselves is, really difficult.

[00:21:37] Chris Battaglia: Can we have a billboard at Heathrow airport that just says when was the last time you logged into your Nest account?

[00:21:42] Elizabeth Fernando: So we have done almost no advertising. You, you will find us on LinkedIn if that's your platform of choice, but we do almost no advertising at all. In fact, it's a standing joke in, at Nest that when you tell people you're coming to work here, they say, what, the home heating company? Because The first thing that comes to their head when they hear the word nest you say no pensions.

Never heard of that. So we are going to start doing some brand building newly appointed head of director of brand. So you should start seeing a bit more of us. The, the other thing that's going on is the government is thinking very hard about. small pot consolidation and how even if the member doesn't actively choose, is there a sensible way of consolidating those tiny pots which might get consumed by fees?

If they just sit where they are moving them into a few consolidated funds such that at least they're now being stewarded well, and they're not getting eaten by fees but that conversation is ongoing at the moment,

[00:22:51] Chris Battaglia: one of the things I think about when you were talking about the scale and.

Quote unquote, negotiating power is some of the similarities between the very large pools of capital in Japan specifically GPIF, which is the largest pension fund in the world. Has there been any backlash from the asset management community at all? And how do you interact with them? Right?

Because you're a not for profit, you've got the asset management business, which is certainly the opposite of not for profit but you need them. And they also need to have their own sustainability and to grow and prosper. What are your thoughts on that?

[00:23:29] Elizabeth Fernando: Yes, it's been, it's been really interesting. And I think we saw it particularly on the private markets side where because we, took a firm line and partly because the legislation initially didn't allow us to

[00:23:42] Chris Battaglia: And for the purpose, sorry, for the purpose of the definition, if you wouldn't mind just telling the audience how you define private markets.

[00:23:48] Elizabeth Fernando: Yes, absolutely. So by private markets. We're thinking about real estate private credit, infrassetructure, and renewable infrassetructure, renewable energy, and then private equity, and timberland. Those are our private money. Any

[00:24:06] Chris Battaglia: venture, any venture in there, or is that in the PE bucket at some level?

[00:24:10] Elizabeth Fernando: we don't do early stage venture. The, the P activity is mainly targeted at the growth capital piece. So we don't do large buyout either. We're kind of, we're trying to make sure that we're giving capital to companies to help them grow rather than trying to get returns through financial engineering.

And I know large buyout managers will be screaming at this point going, we, that's not what we do. But. Yeah, people can have different views on, on that. But we want to be investing in, in growth businesses for the, for the long term. The PE managers, because we said we wouldn't pay performance fees and we wouldn't pay carry a lot of the private market firms laughed at us when we said we were going to get private markets into the portfolio.

And a few of the, the biggest names, I mean, clearly they don't need to work with us because they can get people to pay the fees they want to be paid. But we have found some partners who were able to take the longer view. We've set up evergreen funds so that we build alignment that way with the managers.

They don't have to worry about fundraising for next vintages because they know that if they do a good job for us, they have our money. We will give them additional commitments every year. You build up that partnership. And so we've managed to get people to come to the table at rates. We don't disclose the rates that we, we pay any of our managers, but I think people would be very surprised at where they have settled.

Equally interesting, some of the big names who laughed at us when we first started this have come back. to the table and said, actually, are you open to us doing business with you? I think having us as a partner even if the vast population doesn't understand the Nest brand within financial services, people see the value of having us as a partner because it kind of gives legitimacy to other DC schemes to also have that manager in their, in their lineup.

[00:26:12] Chris Battaglia: Well, it makes sense and I'm, just thinking to myself hearing you talk about private markets and, it was only maybe 4 or 5 years ago. I remember having several discussions with Teresa Ghilarducci of the New School in New York and Hamilton Tony James of Blackstone.

About their blueprint for a new retirement system, DC system in the United States that would use the pipes of our social security system. And in part, it was really focused on expanding the asset allocation remit to private markets. And I remember asking Tony James, well, that, you know, that's.

Really innovative, sophisticated, interesting. How does it impact the future revenue streams and the growth of, the asset management community and I'm paraphrasing here, but, I think that there was an acknowledgement that that's where the puck is going to use a hockey metaphor and that everyone at some point needs to get on board, particularly on the private market side, that the growing pool of capital in the future with regard to retirement sustainability.

Will depend upon more long term place capital, i. e. liquid strategies and private markets. So everyone has sort of got to get on board. So there's still hope for the United States. Don't give up on us yet. Although funny enough the blueprint for that retirement policy most people don't know this, but it was really lifted from the Jimmy Carter president administration in the 1970s, the Carter commission on pensions.

If you read that and go back to 1977, 78, before Ronald Reagan came into office, what you'll find is, is that that piece of research basically recommended that the U S do just that. Find a way to take the highest levels of sophistication of the DB system and move it into a DC like system. And here we are 40 plus years later.

Muddling along with larger pools of capital, but still no access to individuals, primarily to private markets. So again, well done to you and nest, you know, along those same lines, we've learned, a lot from other countries and in this business, and particularly from, how the DC systems around the world have evolved.

Which countries are most helpful to you when you're looking at improving, plan design and investment lineup? And the other part of this question I'm really curious about is who comes to you from other countries and says, wow, we really like what you're doing. Can you help us learn more of what you did at Nest?

[00:28:35] Elizabeth Fernando: Yeah, so we spend a lot of time looking at the Australians, the big Australian schemes, because they started their DC journey probably 10, 15 years before the UK did. So they've, they've been through this curve. They've, they've grown into behemoths. They're building internal teams.

[00:28:55] Chris Battaglia: I've lost track, but I think they're, they're, they're north of 40 trillion us, I think in terms of assets, right?

Maybe closer to five.

[00:29:01] Elizabeth Fernando: and still growing very fast and you're seeing consolidation happening there as well. So the, the smaller players are emerging and then you get players as a result. And. I think when people start DC, all of the attention goes on the accumulation phase and where the Australians now are on their journey, they're beginning to think about the decumulation stage because people are beginning to retire and then they need their DC pension to turn into an income, which we all know isn't, easy to do.

So we're very much looking at, at them, not only for the. The trajectory they've been on in terms of how their internal teams have evolved and their governance has evolved, but also for that decumulation piece in terms of who comes to talk to us as far as I can work out, we all talk to everyone.

So we talk to the Canadians, even though the Canadians are predominantly DB. But they, they come to us to learn. We talk to the Dutch because they're huge and close and they're going through this really interesting DB to TC transition, which is going to be extraordinary if they, pull that off.

we think we can learn from everyone and I think they think they can learn from the UK, both DB and, DC. in fact, yesterday morning, I was talking to a group of Chilean. pension funds who are in the UK doing a conference because they have very good pension system which is undergoing a period of reform and they're thinking about moving to target date funds.

So they wanted to hear about why We had chosen that structure, how we implement some of the challenges. Yeah, so, everyone's learning from everyone, which is, is great.

[00:30:44] Chris Battaglia: it's the way it should be. I think it's one of the things that's a great benefit to this industry is hearing others views in terms of what worked and, what hasn't worked.

You know, along, along the lines of Behavioral finance techniques, and, you mentioned auto enrollment early on would you take us through, the recent advancements at NEST with the implementation of auto enrollment? Like, what needed to really happen for you to think about that?

What were some of the things along that journey? obviously it's, it's helped plan participants tremendously, but are, are there other reforms that you're, thinking about in the future that you can share with us?

[00:31:22] Elizabeth Fernando: Yeah, absolutely. So you asked a question earlier about working with asset managers and, and how they felt about us.

When NEST was first set up, the insurance industry were not best thrilled, I think it's fair to say, about NEST being established, and they lobbied very hard that we shouldn't be allowed to offer a pension in retirement because there wasn't a market failure there. So they argued successfully that pension provision post retirement was absolutely fine and therefore there was no need to allow NEST to enter that market and to do so would be anti competitive because we Had a government we had loan from government at the time.

[00:32:08] Chris Battaglia: Just so I understand correctly in the audience, so in, sort of an in plan annuitization of, income or something different?

[00:32:15] Elizabeth Fernando: So, so it could be something different because in the UK we had forget the year wrong, it was 2014, 2015. you used to be, forced to buy an annuity. If you had a DC pension pot, you were forced to buy an annuity within a certain number of years of retiring.

And in 2014 15, George Osborne, who was the Chancellor at the time enacted completely surprised the market in his budget speech by saying, we're doing away with that rule. So freedom and choice is. upon us and if you want to take your DC pension pot and buy a Lamborghini with it and blow it all on that one thing, that's absolutely fine.

And so the insurance industry, you know, they had been offering the annuity solutions, but they also offer flexible access drawdown and various other things, which you effectively get you an income whilst, whilst leaving you invested. Nest was excluded from that market initially, but because we can see this wall of retirees coming and the idea that you have encouraged, forced people to save during their working life up to the point of retirement.

The idea that you're just going to throw them out into the broader marketplace and put them at the mercy of Insurers and other providers who have paid them no attention up to this point, and that they're going to get well served by that, when a lot of the pots are going to be quite small. I think there's increasing recognition that is just not a sensible thing to do.

And so one of the reforms that we hope is coming up is that NEST will be allowed to offer a proper Post retirement pension so that we can offer members that continuity and they don't have to go out to the marketplace and engage in really very difficult technical conversations, which they are probably not well placed to have. that's one reform that we hope is coming up. The other thing we're looking at is a thing called sidecar savings. This is a really neat idea because our, our members typically don't have, we think they typically don't have a lot of rainy day savings for day-to-day requirements.

And we, we talked earlier about you know, yes, you want people to be contributing more for their pension so that they have a, a better pot at retirement. You don't want to push them into problem debt. in the nearer term by, taking money out of their wages. Sidecar savings is this fantastic idea that the team at Nest Insight have been working on, where a small amount of money is taken out of workers salaries, and it's put into an instant access savings account.

So it's there for when the washing machine breaks, or when the car breaks down. Instead of having to take on debt to get that problem fixed, there's a pot of money that they can call on to cover those outgoings. there are various versions of that being tested, opt out, opt in.

Could you do it as the first element of the pensions contribution goes into the pot? Before it then goes into the savings account, before it goes into your retirement accounts, you're not taking more money from people, you're just taking the same money but distributing it differently. Really interesting stuff.

[00:35:40] Chris Battaglia: I'm curious the timing on that. We had a lot of discussions during the pandemic and coming out of the pandemic. I read many, many, many studies about the lack of preparedness with regard to emergency savings to your point.

And then all of a sudden, many plan sponsors now we're talking about what provisions can we allow participants for emergency savings vehicles, very famous celebrity like spokespeople like Susie Orman. I don't know if you know who that is, in the United States was a big proponent and speaking, about these issues.

Was it, was it a timing issue that precipitated the discussions about, the additional savings pots, or is that something that's been an ongoing discussion over, the last many years?

[00:36:20] Elizabeth Fernando: it's been ongoing for us, so I've been at NEST for almost 4 years now, and it's been something that has been talked about.

all of the time I've been here, but I joined during the pandemic, so I'm not sure how much it predates that. I think there has always been recognition of this tension between Short term savings and long term savings and the fact that you can't access your pension until you're 55. And that's no good to you if you're 28, and you need some money.

So I don't know but I suspect the thinking was how do you avoid people opting out of their pension because they're worried about building up those emergency savings whether it predated the pandemic or not, I'm not wholly sure.

[00:37:13] Chris Battaglia: Interesting.. I wish we had more time to discuss all of the investment things because I think our audience would be really interesting to dig a little bit deeper.

So I only have 1 more question along those lines. And then some closing thoughts about your, feelings about coming to Japan with us in a couple of weeks. But on the alternative side, or the the more illiquid strategies of what you're looking at What is your view of impact investing?

Do you think of it? separately, I know that you and I over the years have had some discussions about socially responsible investing, ESG being somewhat of a predecessor to that are sustainable investing. But I imagine the members if you pull them probably have some view on this. And how does that relate to your investment philosophy?

Do you you think of it? Consider impact to be alternative or more of a mainstream approach for next generation. And how are you thinking about it in your future lineup of asset allocation?

[00:38:10] Elizabeth Fernando: Yeah, it's a really good question. And it's, it is a hot topic. And people define impact differently.

So impact with a capital I we are not doing. So that's where you intentionally invest to have a set of real world outcomes that you set up in advance and you monitor whether or not you're delivering on them. And the financial returns are at best equal and probably secondary to having those real world outcomes.

We don't do that. But what we do do is think about the companies we're giving money to, the businesses we're giving money to, and their impact with a small i on the real world. So we try and avoid giving money to businesses where we think they do societal harm. So for example, we are tobacco free.

In our portfolios, because we can't make a good case for why, tobacco is a good thing in an economy. And we think that their license to operate. Is likely to over time get removed. So we don't know when it's going to happen.

So rather than trying to jump out of the way of the bus, we're just not going to be on that piece of road. That's a dreadful metaphor. That's absolutely shocking.

[00:39:28] Chris Battaglia: No, I know it's, it's a tough one. I think You know, it's interesting, though, you, the way you describe impact with a small i rather than a large i.

Do you think at some point it could be a slightly bigger i, or will it always be constrained to small i by the governance and the fiduciary responsibilities under the guidelines and laws that you have in the UK?

[00:39:49] Elizabeth Fernando: so fiduciary duty and financial returns, financial wellbeing for members in retirement.

I think has to be the primary objective that at the end of the day we are here to provide pensions and we shouldn't lose sight of of that rationale for why we exist. We do also think though that the world into which members retire is important because there's no point having built up a savings pot if the world you're retiring into is

[00:40:21] Chris Battaglia: I mean, I think, Al Gore said there is no planet B, right?

So.

[00:40:24] Elizabeth Fernando: Exactly. I mean, one is always judged with hindsight. But you make your investment decisions on the basis of forecasts, which may or may not be right.

[00:40:34] Chris Battaglia: Right.

[00:40:34] Elizabeth Fernando: So if at the point we made an investment, we reasonably thought that the financial returns were going to be equally as good as something that didn't have real world impact, that would be fine.

Even with the fiduciary duty lens, even if when we got to that point where the returns get realized, it turns out actually they've been worse. Because it's the decision and the intentionality at the point of decision that matters, not the outcome. the thing that puts me off impact with the big i is The focus at the moment on measuring and monitoring real world outcomes, which is really tough, and you could waste a lot of time and energy ticking that box to the right standard, and then it's taking attention away from other things that we could be doing. That could also be having real world impact, but we didn't set out with the intention of having that impact.

If that that makes any sense whatsoever,

[00:41:26] Chris Battaglia: makes sense. I mean, the investment world has been at it in terms of measure, measurement and benchmarking for decades and decades. And many would say that we still don't have that part, right? That there's many different ways to sort of look at it timeframe. So, and so forth, time horizons.

And not everyone agrees on that either, you know, and some are more absolute. Return minded as opposed to benchmark minded. So to your point, how do we get up to speed on, the actual data side of things in terms of having a measurement tool in place to, really guide whether or not impact with a large i is, really doing what it's supposed to do.

The last question unfortunately, as I said, I would love to talk to you more, but we'll be together in Japan. And Looking forward to that. What are you expecting to learn from your journey to Japan?

[00:42:13] Elizabeth Fernando: I am so excited about this because despite having been an investor for more years than I'm going to own up to I've never been to Japan before.

So I am so excited about this. It's it's, it's, it's quite amusing. So I am really looking forward, although interestingly over the years, because there are various pension fund forums. You know, I do know quite a lot of the people who I know are going to be at your symposium because I've met them in international pensions conferences and the like.

So I'm, looking forward to re meeting them because COVID got in the way of, of some of those, those relationships. But also just hearing about this journey that Japan is on and the view from the local investors about The corporate governance reforms that are going on. Has that third arrow finally fired?

And is the Japanese stock market, it's obviously had a very good run until beginning of August, but Are we into the beginning of a new horizon, new dawn for, for Japan? So understanding, their perspective on that, because I think there's nothing quite like hearing from people on the ground, and people who've been living it, because as an outsider, you parachute into somewhere, and it's all new and shiny, and it's very easy to go, very busy, and it's, it's very dynamic, but you've got nothing to compare it to.

The other thing I'm really interested in, is their perspective on fixed income and the whole maturing of the pension, the DB side of the pension, how that's going to get managed particularly with yields in Japan being so low you know, they've got some really interesting challenges ahead of them, how they're thinking about that, the pivot to DC yeah, lots of interesting things to learn.

[00:44:00] Chris Battaglia: Well, you'll learn a lot and they'll learn a lot from you. And I think Japan is extremely excited to have you as our guest and I'm, very grateful that you're making the journey and very grateful for the time on this podcast. And by the way, we, we have added a new very important association to the lineup just since we spoke, which is the research for Institute of policies and pension and aging, which is RIPA. So you'll, hear from them and you'll be able to meet with them as well and learn a lot about the policies and the research behind Japan's aging demographics and how it's having an impact on reform.

pension issues and legislation. So we're really happy to have them. Elizabeth Fernando, Chief Investment Officer of Nest. I'm very grateful for the time we had today. Thank you very much for joining us. And as they say in Japanese, Ja Mata, means I will see you soon, but not in another Zoom call.

I'll see you in Tokyo.

[00:44:54] Elizabeth Fernando: very much looking forward to that. And thank you very much. This has been, this has been great fun.

[00:44:59] Chris Battaglia: Terrific. Thanks again.