The consultation paper, called ‘Building personal accounts:
designing an investment approach’ is aiming to draw views on good practice and expertise from across the industry on the most appropriate investment approach for personal accounts.
Pada says those eligible for personal accounts can be expected to find making financial decisions challenging, and have less experience of planning for their retirement when compared to the working age population in the UK.
The personal accounts target group is less likely to have any existing savings and be less comfortable with the idea of investment risk and more cautious about how they want their contributions invested, it says.
Research commissioned by Pada found 44 per cent of the target group to be risk averse, with 17 per cent mildly risk averse, 29 per cent risk-seeking and 10 per cent not sure either way.
The consultation is canvassing views on what the overarching objective of the default fund should be, bearing in mind the different contribution profiles and how that will impact on the investment objective. Pada also wants suggestions on how the investment objective can be communicated to members effectively in order to promote confidence in the scheme. The paper analyses three investment objective approaches – target replacement income, benchmark-driven return and best-efforts without any specified target.
The consultation is also seeking views on the level of risk that future members should take, the levels of return needed to ensure their contributions grow to meet their retirement expectations and the importance of reducing the dispersion of outcomes that the investment approach generates.
Pada is also seeking views on active versus passive management and the suitability of different asset classes for the default. Lifestyling, target date funds and the broader issue of de-risking schemes as they approach retirement is also on the agenda.
Pada chief executive Tim Jones says: “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 investment director Mark Fawcett says: “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.”