You may not want an iPhone 6. You may have never owned anything produced by Apple. You may not even be on the internet. But if you want enough money in retirement, you had better hope Apple shifts zillions of the things.
One of the extraordinary facts to have emerged in our review of auto-enrolment – two years old this week – is where the money is going. Millions of people, often on relatively low incomes, are for the first time saving into a pension. Millions more will join them over the next few years as the scheme is forced on to almost every employer in the country, no matter how small.
The “default” fund that employers can use in order to comply with the rules is called Nest (National Employment Savings Trust). So what is it buying on your behalf to secure your future? It turns out that shares in iPhone maker Apple are easily the biggest holding. After that, it’s oil company Exxon Mobil, Google and Microsoft. Only one British company creeps into the top 10 holdings, and even then it’s only part British: Royal Dutch Shell. The rest are American, with the exception of Nestlé, a Swiss company.
Just 8.5% of the shares in Nest are UK companies, and only a further 17.4% are even European. The lion’s share – nearly 55% – are in North America.
It’s not that the managers at Nest have decided to blow our futures on a gamble that Apple and Google are still going to be around in 40 years time (anyone remember ITT?); instead this is just a fact of “indexation”. Nest and other similar pension fund managers put the money into index funds that replicate global stock markets – and Apple is the world’s biggest company by market capitalisation, worth around half a trillion dollars.
Indexation keeps charges low – Nest is fantastically cheap. There are lots of good reasons to spread your investments over a diversified range of international companies, which Nest is doing. What’s more, in achieving returns of 10%-plus a year since launch, it hasn’t had to face too many awkward questions.
But if interest rates rise, the fund will have a much bumpier ride. It is surprising just how much of the fund is in government and corporate bonds (around 35%) which are virtually guaranteed to fall if rates rise. Bonds have been a great investment over the past decade and a half, but many fear they are now in bubble territory.
Make no mistake, Nest is going to be huge. It won’t hit the size of the $900bn Norwegian oil fund, but as both the level of contributions is increased (from 2% of pay to 8% of pay by 2018) and more workers join, its assets are going to escalate fast.
Conventional City of London ideology is informing its investment decisions. Yet in Singapore, the country’s compulsory pension fund has been mobilised to held build local housing. Ottawa’s pension fund is extraordinarily interventionist. Given that we will be throwing hundreds of billions of pounds into a pension scheme for British workers, could we at least have a wider debate before sending half of it to Wall Street?