As readers of Corporate Adviser, you will almost certainly know that Pada has been engaging widely with the investment industry, consumer groups and all interested parties on designing the investment strategy for the personal accounts scheme.
To recap, we have been hard at work since the launch of our discussion paper back in May 2009. The paper generated a total of 67 responses from a variety of stakeholders and, in order to gather a wide range of opinions, we have also held 10 roundtable discussions to examine in depth some of the issues raised by the consultation. We have also been conducting research to inform our thinking on the investment approach for personal accounts, all of which has been highly informative.
The publication of our response document: “Key findings of the consultation” is the culmination of all this hard work by Pada and its takeholders. It is important to note that the response document does not constitute our package of recommendations for the investment approach to the trustee corporation that will be responsible for running the personal accounts scheme. The document is a significant milestone on our way to producing our recommendations and shows the direction of travel. The structure of the key findings paper broadly mirrors the original discussion paper, where we first looked at the characteristics of our future membership before moving on to the key issues around design of the default fund and finally considering what other fund hoices should be offered.
We received overwhelming support for our focus on our future members in designing the key elements of the scheme. Through the response document we have explored respondents’ ideas to help ensure members are persistent contributors to the scheme. This is undoubtedly the best ay to maximise their retirement incomes – the impact of even high investment returns diminishes if many people have opted out years earlier.
One of our key proposals has been that we should use target-date funds in order to manage members’ asset allocation risk through to retirement. In the US, this is a popular approach to lifestyling and is likely to become a mainstream approach in the UK. Target-date funds also give those responsible for asset allocation significant flexibility throughout the savings career of the members.
On this basis we have, at the suggestion of several stakeholders, challenged conventional wisdom that young members should have high risk portfolios because their risk capacity is high. In fact, the amount of capital invested is so small in the very early years that the risk taken in the portfolio, at this time, hardly impacts final outcomes.
Therefore, if the trustee corporation felt it could increase participation and reduce opt out rates by taking a more cautious approach to the first few years of investing, then it would be entirely rational for it to adopt a lowerrisk approach – there is no such thing as a ‘no risk approach’ – and thus
encourage the savings culture to grow.
At a later date it will be necessary to take more risk in order to generate sufficient returns, although we still believe that the 100 per cent equity
approach common in many default funds today is unlikely to be suitable for our future members. We are also exploring ways we can deliver a more diversified approach to investing in growth assets.
Understanding our members – their likely building-society savings mentality, their risk aversion and their dislike of volatility and loss – has led us to put forward an investment objective that better reflects these characteristics. We are, therefore, suggesting an approach that aims to beat inflation over the long term will best suit our members’ needs. This would be relatively straightforward to communicate, as well as being clear and measurable and thus help the setting of expectations. Exactly what the target in excess of inflation will be is a work in progress, but it could vary for different stages of savings.
Finally, beyond the default fund, in which we anticipate as many as 90 per cent of our members to be invested, we expect to offer a carefully selected but limited range of funds. These are likely to include an ethical fund and one ormore religious-compliant funds. On this latter point we have had strong support for offering a Shariah fund but, so far at least, no other religious funds have been seriously promoted.
We will be conducting further research into our future members and the response document does not signal the end of our engagement with the
industry. We are looking forward to working with our stakeholders on investment issues in the future.