UK - The Personal Accounts Delivery Authority (PADA) has issued a discussion paper to help inform its trustee corporation of its thoughts on investment strategy, and which includes thinking on corporate governance and responsible investing.
PADA raised a number of consultation questions
In the paper relating to the investment objective and design of the default fund, as it anticipates this is where the majority of members will invest their savings.
Tim Jones, chief executive of PADA, said: "This discussion paper seeks to draw on the experience and expertise of the investment industry, pension scheme providers, consumer groups, employers, and existing trustees to help PADA design a pension scheme that will provide the best outcomes for future members as well as access to low-cost pension savings."
PADA suggested the default fund will include a mix of bonds, equities, cash and other investments, and has requested feedback on the use of alternative assets such as hedge funds, commodities and infrastructure which could be used, as "we expect the trustee corporation will seek to improve the risk and return trade-off for scheme members through diversification across asset classes, markets and industries".
In addition to the design of the default, PADA highlighted the issue of what level of choice should be given to members in addition to the default fund, as it pointed out too much choice could be as bad as too little. In particular, it noted the approximate 780 fund choices in the Swedish pension system had resulted in over 90% staying in the default fund.
Some of the options currently under consideration are risk-graded funds; religiously-compliant funds and ethical funds, while other possibilities could include diversified growth, gilts, guaranteed and with-profits funds.
The paper highlighted the need for the trustee corporation of personal accounts to achieve "high quality corporate governance" and confirmed trustees would exercise voting rights in respect of the "vast majority" of its holdings, although PADA confirmed it is seeking views on the extent of corporate engagement as it could stray into responsible investment or ethical investing.
It stated: "The trustee corporation may increase its levels of corporate engagement and move into the responsible investment sphere, by considering issues such as the environment or society. The trustee corporation may decide to exclude investments in certain areas due to ethical concerns, which may or may not involve considerable levels of corporate engagement and may be considered as acting in a socially responsible way".
The discussion paper also pointed out that while personal accounts will be "well positioned as a large shareholder to exert influence on the companies within which it invests", high levels of corporate governance will generate additional costs so "the trustee corporation will need to balance the extra costs of corporate governance with increased benefits for members".
The discussion paper also revealed it is expected that the nominal retirement age for the scheme will start at 65 but may rise in line with increases in the state pension age, while the favoured investment strategy for members approaching retirement age is a "target date" series of funds rather than lifestyling.
It warned that because of the "likely numbers of members, and the likely number of different employers and occupations, a single mechanistic approach that assumes all individuals will retire on a given date, may not be appropriate for the default fund of personal accounts".
Instead, the paper suggested a target-date fund approach "appears to meet the requirements of reducing costs, offering straightforward solutions and encouraging persistency in saving", while also providing flexibility for the trustees to set strategic and tactical asset allocations for different age ranges.
Mark Fawcett, investment director at PADA, said: "This is a great opportunity to have a debate about how to design the best possible investment approach for the personal accounts scheme. We are looking to hear both innovative and proven solutions and crucially how these can be delivered at a low charge."
Rachel Vahey, head of pensions development at Aegon UK, warned that the concern is the economic crisis and fear of losing money could lead PADA to design an "ultra cautious default fund, with little potential for investment growth", which coupled with low contributions could impact people's retirement income.
Instead, she argued people have to understand "building a decent income in retirement involves paying decent contributions and taking some investment risk at the right stage of saving".
"PADA and the Government have a responsibility to improve savers' investment knowledge as part of the personal accounts journey. Simply getting people into a fund and leaving them there for 20 or 30 years is unlikely to be in their best interests," she added.
The closing date for submissions on the discussion paper is 7 August 2009 and a summary of responses will be published within the following three months.
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