The UK’s National Employment Savings Trust (NEST) has seen all its default funds achieve positive returns over the last year, despite what it said were challenging times facing investors.

The master trust, which at the end of March had £825m (€1bn) in assets under management, ended the financial year with nearly 3m members – the majority of whom were saving into its 50 default retirement date funds.

NEST released its annual report as the UK government asked whether the scheme should be allowed to offer its members drawdown products, an area from which it is currently barred, as pension scheme members were required to annuitise when NEST’s founding statute was drafted.

Despite nearly doubling scheme assets over the course of the year, NEST attributed a net increase of £406m to member contributions, and only £16.9m to investment return.

This compared to a £38m gain from investments during the 2014-15 financial year, and a net increase in assets of £296m from contributions.

While all of NEST’s default retirement date funds achieved a positive return, volatile investment markets meant the consumer price index (CPI) plus 3% target for members in growth phase was missed.

Of the sample of funds listed in its annual report, NEST said members in the 2040 fund achieved an annual return of 0.66%, while a member targeting retirement in 2059 achieved a return of 1.4%.

Only funds targeting outperformance relative to CPI or the London Interbank Bid Rate (LIBID) were able to outperform their benchmarks, and both the ethical fund and sharia fund fell short, returning 1.21% and 1.32%, respectively.

“The year under review was a challenging time for markets, with considerable investment volatility, particularly in the summer of 2015 and at the start of 2016,” NEST said.

It added that stocks with “heavy” commodity exposure suffered over the course of the financial year, and said credit markets were “challenging”.

“Against that backdrop,” it said, “NEST Retirement Date fund returns were understandably lower than in previous years.”

However, it emphasised that the annualised performance for its funds since inception in 2011 remained “comfortably ahead of target”, as was the case with the ethical fund’s 9.9% annualised return compared with its target of 4.6%.

Default funds in the lower-risk foundation phase have also fared well since inception, with members targeting retirement in 2059 seeing an annualised return since inception of 7.9%, compared with its annualised investment target of 1.56%.

The scheme’s annual report was released as the Department for Work and Pensions launched a consultation on the future of NEST, asking whether the scheme should be allowed to offer drawdown products after the introduction of pension freedoms and the end of compulsory annuitisation.

The consultation suggested allowing NEST to offer decumulation products to its existing members, and noted the scheme’s previous research, which saw it propose the introduction of blended products combining deferred annuities and income drawdown.

In emphasising that NEST would only offer decumulation to existing members, the DWP is likely seeking to stave off criticism from an industry fearful that the scheme will dominate the nascent drawdown market.

It therefore also asked those responding to the consultation, which closes at the end of September, to detail the impact of the decision on individuals, and other pension providers.

Commenting on the consultation, pensions minister Ros Altmann said: “NEST has played a vital role in the success of automatic enrolment, and its importance is likely to increase in coming years.

“It is right, therefore, that we now consider how it continues to deliver its services in future.”

NEST has 3.3m members and has seen its assets increase to £970m. 

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