Lord McFall's report could create unrealistic expectations, experts say

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  • Lord McFall's report could create unrealistic expectations, experts say

UK - Experts have warned that a new approach to risk management could create unrealistic expectations of an "investment Valhalla", as the Workplace Retirement Income Commission (WRIC) published its final report today.

The report suggested a number of changes to pension provision, urging contribution rates in excess of the 8% limit for auto-enrolment and recommending a more rigid framework for pension funds that allowed for risk-taking while maximising member returns.

Arguing that a greater balance needed to be struck between risk and volatility, the report said that government should "show leadership" in creating an environment where employers feel they will be rewarded for taking greater risks.

"The financial services industry and the Pensions Regulator should jointly develop approaches that help to smooth investment volatility for savers," it added, further saying that a cap on investment charges may be prudent, as employers were currently open to levy charges as high as deemed necessary.

Chairman of the commission Lord McFall said pension savers deserved more "bang for their buck".

However, Brian Henderson, European head of defined contribution at Mercer, said there was a conflict between these suggestions, as greater investment returns with low volatility was likely to lead to higher charges.

"I don't think what they are aspiring to do is a bad thing, but they need to be careful it doesn't become 'investment Valhalla'," he said. "You want to have exceptionally good returns with a lot of the uncertainty taken away at a really low cost."

He said that, in such instances, it was important to see what approaches were practical, pointing toward the strategy implemented by the National Employment Savings Trust (NEST), while conceding that such an approach would not result in high levels of certainty for members.

Addressing comments made by commission's chairman Lord McFall that pension scheme members deserved more "bang for their buck", Henderson questioned what other risks funds could take during the accumulation period beyond an increased equity exposure to deliver on such promises.

He accepted that the commission wanted a reduction in risk.

"Therefore, schemes don't really need more bang for the buck , but what they do need is better management of that bang," he said.

Meanwhile, the suggestion that contribution levels for auto-enrolment should be escalated has met with criticism from business representatives.

The proposal to increase contributions beyond the 8% threshold was not warmly received by the Confederation of British Industry (CBI), which warned that hike would risk driving away savers.

Arguing the increase was "not the right way" to improve savings, CBI director for employment Neil Carberry said: "The current plan to introduce a floor of 8% saving from next year remains the best way to ensure more people who can afford to save do so."

Explaining the suggestions to increase contributions, McFall said of the lack of pension savings: "Auto-enrolment will help, but it's a halfway point, not the final answer."

He added that he hoped the report would serve as a catalyst for debate.

However, Carberry argued the limit was agreed after consultations between employees and employers during Lord Turner's commission, which agreed the initial auto-enrolment proposals and set at a level "hard-pressed employers" could afford.

Carberry added: "Further increases in the minimum contribution would put employers and employees under even greater financial pressure and may drive people away from pension saving altogether."

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