While 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.
Investment theory emphasises that diversification across asset classes is
crucial to long-term performance and also has the benefit of minimising
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.
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
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.”
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