Fund choices in the personal accounts regime will to some extent be deliberately restricted because most consumers either do not want or do not understand choices put before them.
For example, evidence on asset allocation suggests many people adopt a naïve strategy.
“Some heavily base their decisions on funds’ previous returns, and others concentrate their assets in their own employer’s shares, mistakenly viewing them as safer,” the document states in Chapter 5 Investment and accessing savings.
However, it is also important to retain some choice, therefore the proposed regime will include a troika of options: a default fund for those who do not wish to make choices, a range of bulk-bought funds at low charges, and a wider range of funds, including branded funds and “social, environmental and ethical investments” (SEE).
The government will leave the oversight of these choices to the personal accounts delivery authority, which will be tasked with choosing investments “in line with members’ interests”.
This may be of particular importance to the SEE market.
“The UK SEE market has total assets under management of £20.6bn on a narrow definition: the broader definition expands this to £530bn worth of total assets under management.”
In terms of the default fund option, the government says they will have the following characteristics: structured to deliver and appropriate trade-off between risk and return for the target group; will be invested across many different asset classes to reduce specific investment risk; will be life-styled.
To ensure savers’ money is safe from “external pressures”, the Paper also outlines proposals to initiate primary legislation in a second Pensions Bill to require the accounts delivery authority, on the advice of an “investment committee”, to develop “an appropriate investment strategy.”
This committee would consist of “people with appropriate knowledge and skills”, which would provide advice on the recruitment of investment managers, and which would be independent of government
However, what the paper does not say is whether appointments to the committee would be done by the government or by the delivery authority. The suggestion in any case is any responsibility for investment decisions will be laid at the feet of the latter – possibly freeing up the government from any future liability for investment decisions particularly affecting those choosing the default options.
Come time to divest, the government is recommending a minimum age of 55 before which income cannot be accessed.
Income would have to be secured by age 75, and up to 25% of any person’s fund can be taken as a tax-free lump sum – although if the fund is “small” the requirement to secure a pension income would not be applied and it could all be taken as a lump sum. The Paper does not define what “small” is. Also, it suggests the process by which individuals will access their savings in retirement is another area the delivery authority will have to take responsibility for developing.
This involves reference to HM Treasury’s review on the Open Market Option for annuities, announced with the Pre-Budget Report. One current suggestion is for a two-stage approach to buying an annuity within the personal accounts regime. The first stage would be to identify the most suitable type of annuity, including using “guidance”, while the second stage would consist of actually selecting a provider of the product, again with other help, such as the FSA’s comparative tables.
Bulk buying of annuities was considered - to enable those with “small pots” to acquire pension income, where otherwise the administrative costs would equate to a major portion of the pot – but rejected, the Paper notes, because “the government has found no evidence that bulk purchasing of annuities could lead to a significant increase in value for members”.
If you have any comments you would like to add to this story or would like to speak to its author about a similar subject, telephone Jonathan Boyd on 020 7484 9769 or email [email protected].IFAonline
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