NEST Public NEST Pension UK experience of investment

NEST Public NEST Pension UK experience of investment fund choice and default strategies NEST Public © NEST Corporation 2017

Workplace pension reforms What’s changed? NEST Public Beforeauto After autoenrolment Employers have to Employers offer chosea contribution whether to to certain contribute jobholders Do. Active nothing = saveoften in a choice pension needed from scheme worker Behavioural Auto barriers to enrolment take-up Not economical NEST is for existing designed for providers to everyone supply lower earners Saving was is a ‘minority the norm sport’ © NEST Corporation 2017 2

NEST Public NEST key statistics 442, 000+ Employers © NEST Corporation 2017 5. 3 m+ 17, 400+ Members with £ 2 bn funds under management NEST Connectors 3

Alternative fund choices – supporting decisions NEST Lower Growth Fund NEST Preretirement Fund NEST Higher Risk Fund diversified lifestyled low cost NEST Public NEST Ethical Fund NEST Sharia Fund diversified dynamic lifecycled low cost © NEST Corporation 2017 4

How NEST delivers its default stratgey Wide diversification – risk spread across different asset classes © NEST Corporation 2017 Clear objectives and risk budgets In-house expertise to blend funds from leading fund managers NEST Public Efficient delivery through single year target date funds 5

Default fund usage and alternative fund options NEST Public 82% is average percentage of membership invested in the default fund in the UK Number of alternative funds offered in UK schemes 21 -30 4% >30 15% 16 -20 8% 1 -5 7% 6 -10 39% 11 -15 27% - DC Pension Plans in the UK; An Analysis, 2017; Pensions Insight & JP Morgan Asset Management © NEST Corporation 2017

Default fund usage and alternative fund options NEST Public 99. 6% of NEST members are in the default NEST Retirement Date Funds range Use of NEST's investment options Pre-retirement Lower Growth Fund Sharia Fund 5% 3% 1% Ethical Fund 19% Higher Risk Fund 72% Data at end of July 2017 © NEST Corporation 2017

Demand side Low financial literacy and capability of long term savings vehicles (lower income highly sophisticated short term budgeters) Procrastination – ongoing nature of investments Naive diversification Little understanding of fees and charges (even for well educated) Brand recognition dominates decisions © NEST Corporation 2017 NEST Public

401(k) plans in USA - The Efficiency of Sponsor and Participant Portfolio Choices in 401(k) Plans, 2009; Tang, Mitchell, Mottola, Utkus © NEST Corporation 2017 NEST Public

Supply side NEST Public Complex: multiplicity of products – is there genuine choice? Charges: charges during accumulation are high and vary widely across providers Intermediation - Financial advice: availability, cost © NEST Corporation 2017

European guidance on fund risk categorisation © NEST Corporation 2017 - Note on CESR’s recommendation for the calculation of synthetic risk reward indicator, Investment Management Association (now the Investment Association) UK; 2010 NEST Public

What sort of choice? Risk category Annualised volatility Description of volatility (ESMA) 1 2 3 4 5 6 7 0 -0. 5% 0. 5 -2% 2 -5% 5 -10% 10 -15% 15 -25% >25% Very low Low Medium to high High Very high © NEST Corporation 2017 NEST Public

Do normal rules of supply and demand work? NEST Public Asymmetry of information Mis-alignment of incentives / principle agent problems ‘There are three sources of market failure in superannuation: member inertia and disengagement; product complexity and low consumer financial literacy; and conflicted remuneration structures within the financial planning industry’ (Australia Industry Super Network 2010 – Cooper review) © NEST Corporation 2017

NEST Public Outcomes for members and wider implication for public policy and markets Less confidence in system (mis-selling scandals in UK) Lower savings rates leading to lower pots, more reliance on the state High charges – capital spent on marketing and acquisition Limited innovation Inefficient allocation of capital to economy – insufficient scale to drive costs and reduce drag © NEST Corporation 2017

NEST’s solution NEST Public Make the market work by being an informed customer on behalf of members Provide benefits of scale and reduce admin burden Introduce more competition between fund providers and support greater innovation Encourage market to focus on key elements of investment (not marketing) Encourage standardisation of cost and charge reporting to allow better comparisons Develop long term relations with market providers © NEST Corporation 2017