The National Employment Savings Trust (NEST) is tendering for 10 single-year maturity Gilt funds as it looks to boost returns while maintain risk for two segments of its default fund.

NEST, the auto-enrolment vehicle backed by the UK government, operates three segments in its target-date default funds of which 99% of its 1.7m 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.

The foundation phase currently has a high cash exposure through the fund’s belief other asset classes are nearing full-value.

However, NEST said it was looking to replace its cash holdings with UK Gilts, providing a yield of around 1 percentage point higher than one-month Treasuries.

Mark Fawcett, CIO at NEST, said it would now use a range of short and medium-dated Gilts but focus primarily on the short end.

“[This is to] match when cash [in the foundation phase] would convert into growth assets,” he said.

“[The decision] is a function of the fact yields are so low on cash – we are trying to eke out extra return without taking on additional risk.

“We will be a little more cautious when we move into the medium-term (6-10 year) Gilts because they will be somewhat more volatile.”

In the consolidation phase, NEST currently has all target-date funds up to and including 2017 targeting cash but de-risks into money market funds.

Fawcett said NEST thought it could improve returns by switching into Gilts with maturities that match the target-date of the fund.

“[An extra yield of 30 basis points] is not a massive improvement but a reasonable one without risking capital,” he said.

“It follows similar principles to liability-driven investment management where you match fixed income maturities with the cash outflows of a fund.”

The 10 single-year maturity Gilt funds requested by NEST will be added to its building block of funds used in the default strategy.

“Gilt funds will be replaced on a rolling basis – when the 2016 Gilts mature, a 2026 maturity Gilt fund will be added,” it said.

The tender process will run until 9 January 2015, with a contract expected to be awarded in the spring.

NEST also recently launched its consultation on the future of the fund in relation to changes to the defined contribution market announced in the Budget.

The consultation will look at the role of annuities and the possibilities of providing a combination of annuities and income-drawdown products.

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