UK - The UK National Employment Savings Trust (NEST) has denied claims its default funds offer purely low-risk investment options.

Speaking as the scheme published research detailing members' loss aversion, a NEST official argued that the data showed the defined contribution scheme would be unable to simply rely on members to stay enrolled in the scheme permanently, assuming they would be too complacent to opt out.

The research, conducted by Opinion Leader, found that potential scheme members would not be adverse to significant one-off losses, but would seek alternative methods for saving if significant losses recurred over a three-year period.

The aversion was lessened when three years of losses were spread out over a five-year timeframe - despite research noting that most respondents did not expect pensions to decrease in value at any point.

A NEST official noted that auto-enrolment was often seen as succeeding through member inertia alone and that schemes, including NEST, would therefore not have to concern themselves with members opting out due to unstable market conditions.

The official continued: "Both aspects of the research turned in suggest that, unlike the laws of physics, this inertia can be broken and we need to respect that - understand it - and give it an appropriate weight."

The official went on to refute claims that NEST's investment strategy, targeting only growth covering consumer price index (CPI) increases in the Foundation period, was too low-risk. The Foundation period marks the first five years of a new member's investment strategy upon entering the workforce.

"We don't have a low-risk investment strategy - we take appropriate risk at the appropriate time," the source stressed, indicating that if certain risk was not allowed, it would mean members would not receive sufficient pension income at retirement, and that, in the current inflationary environment, risk was needed to outperform CPI.

Further research by DCisions, examining the impact of pension savings behaviour during the financial crisis, found that NEST's target market of low-income earners was more likely to cease contributions altogether during financial upheaval.

While only 10% of all examined pension savers opted to stop contributing, this number increased to 14% when examining employees in NEST's target market.

NEST's chief investment officer Mark Fawcett said the research would lead to investment solutions recognising the fact that many in the scheme's target audience find pensions intimidating.

"The challenge for NEST is to encourage our members to start saving, continue saving and take appropriate investment risk to support them in building a better income in retirement," he said.

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