The National Employment Savings Trust (NEST) has selected Legal & General Investment Management (LGIM) to manage its strategy shift from cash and money market funds to UK Gilts.

LGIM will manage 10 single-year maturity Gilt funds for the state-backed master trust as it looks to squeeze additional yield from its cash exposure.

NEST operates 47 target-date funds for its members.

The auto-enrolment vehicle, which recently announced it has 2m members, said the funds would be used in both its foundation and consolidation phases, replacing cash holdings.

Cash is held in the foundation phase due to expectations other assets are nearing full value, and its consolidation phase strategies de-risk into cash as members expect to take lump sums at retirement.

Mark Fawcett, CIO at NEST, said the LGIM funds would be important elements to delivering NEST’s risk management strategy.

“The aim is to provide improved returns relative to cash for members both as they build up their pot and at the stage when they’re preparing to take their money out,” he said.

Sarah Aitken, head of distribution for institutional clients at LGIM, added: “This new range of UK Gilt funds is specifically designed to provide some additional yield over cash whilst maintaining capital protection.”

At the time of the strategy shift, Fawcett said the use of Gilts would provide an additional 1-percentage-point yield compared with one-month Treasuries, while maintaining a similar level of risk.

LGIM’s funds will be used on a rolling basis – as each single-year fund matures, it is replaced with a 10-year maturity fund.

The funds will invest in mainly short-dated Gilts with some medium-term exposure.

NEST operates three segments in its target-date default funds of which 99% of its members are invested.

This includes a low-risk ‘foundation phase’ meant to protect savings’ value for newer and younger members, a ‘growth phase’ and a ‘consolidation phase’ for members approaching retirement.

NEST recently consulted on the future of its fund and investment strategy design given the changes coming into force next week regarding defined contribution retirement options.

The moving away from compulsory annuitisation means members can access their savings in a variety of manners, which NEST said it must cater for.

Preliminary findings from its consultation found a general consensus on creating default retirement income solutions for members who valued choice but refrained from making active decisions.

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