Millions of vulnerable savers will be left exposed to inflation risk due to the plans of NEST Corporation’s ‘target date fund’ approach for its default fund, according to investment consultancy No Monkey Business.

NEST, which is set to become one of the world’s largest pension funds within the next decade, is opting for a structure that has proved successful in the US, called ‘target date investing’, meaning the fund must deliver returns on a range of pre-set retirement dates.

This investment style is seen as ‘the next big thing’ and is likely to pick up speed in the UK. The trustees of NEST are using ‘lifestyling’ techniques that break into three key phases in the run up to retirement; foundation, growth and consolidation.

No Monkey Business said that the argument for reducing equity risk in the foundation stage has not been made and the benefits of using risk-reducing assets as target dates approach depend entirely on identifying the right assets. Conventional gilts are the wrong asset at both stages.

Stuart Fowler, NMB’s founder and investment director, said: “The massive impact of inflation will simply replace equity volatility and a mistake like this would undo all the good work of ‘lifestyling’ and keeping costs low. The state of the art for this type of investment architecture is Liability Driven Investing, not the outmoded ‘balanced management’ approach, with its excessive reliance on correlations between different asset classes.”

The NEST Corporation has responded to the criticism by saying the inflation was a top priority for the body.

Mark Fawcett, chief investment officer at NEST Corporation, said that he and his colleagues were “very aware of the risks of inflation.“

“One of the recommendations that came out of our investment consultation was that our investment objective should be focused on beating inflation because that is very important for our members. The Trustees are considering the investment strategy at the moment and the issue of inflation risk is at the top of their agenda. NEST will have a carefully constructed asset allocation in all stages of the member’s savings career,“ he said.

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