RSS feedsWhile the government has a very keen interest in cutting back on the number of pensioners the state is going to have to support in the decades to come, its chosen means of achieving this, the Personal Account (PA), is likely to pose a few challenges that the politicians have not really taken on board – questions such as, who, exactly, is going to invest the money; what will be the impact of PA money on asset classes as it washes in and out of them; and what kinds of return the scheme can be expected to generate.
The government intends to put the investment business out to tender and expects to appoint several investment houses over time. But the government is setting a very low administration fee of just 0.3% for the PAs – a rate that precludes high-quality active management. Instead, the low administration fee virtually traps PA investment in the direction of some kind of scalable, passive, index-tracking type approach. That is all well and good, but index tracking funds track the market down as well as tracking it up, so performance is an issue.
Diversification
Investment theory emphasises that diversification across asset classes is
crucial to long-term performance and also has the benefit of minimising
investment risk.
One diversification option, that chosen by Macquarie Bank in Australia on behalf of Australian PA members, has been a high-profile hunt for suitable infrastructure investments. As the bank pointed out when it launched its infrastructure fund, pension fund investors like infrastructure assets because they are essentially defensive in nature.
However, as Andy Green, head of investment services at Deloitte, points out, this opens up the prospect a few years from now of PA members “owning” a variety of UK, European and even global airports, harbours, railroads and so forth, if, indeed PA fund managers follow their Australian colleagues down this road.
“It is interesting to contemplate PA investment managers with a wall of money at their disposal bidding for UK infrastructure assets,” Green says. The point is that once you have funds on a grand scale – which PA fund managers will have – and start moving those funds into discrete, not-so-scalable assets, you get market-moving and market-distorting effects.
Investment levels
One of the challenges for PA managers, Green says, is the same that constantly
confronts outstanding managers in investment boutiques: you can get stellar
performance from particular investment vehicles provided you hold back the
weight of money going into the outperforming vehicle, by closing the fund to new
money, for example. But PA managers are going to have to invest substantial sums
on a continuous basis, so ‘closing the fund’ is not likely to be an option for
them.
Why does this matter? Because individual PA retirement pots in 20 to 30 years’ time are going to be low on the investment levels currently being mooted. Unless the investment managers are able to crank the wheel in some outstanding fashion for PA members, the majority are going to need government support anyway in the form of supplemental income in their retirement.
Rachael Vey, head of pensions development at Aegon, says, “What worries us is that PA members could go through their entire working lives paying in to the PA, never choosing to opt out, only to discover when they retire that their pension is not something they can live on.”
