Comments from ACCA
ACCA is pleased to comment on the consultation on the above. ACCA is a professional body with over 130,000 qualified members who work in public practice, business, and the public sector, in the UK and around the world. Most of our members in the UK work in the SME sector, either as businesspeople themselves or as practitioners providing financial and business advice to businesses. Given this fact, and the fact that the system of personal accounts will affect the SME sector more than larger businesses, ACCA is taking a keen interest in the development of the system. These comments have been put together by ACCA's Pensions Committee, which comprises members with wide experience of pensions, as accountants and auditors, employers, investment managers and trustees.
ACCA welcomes the public consultation on this matter. We consider that the adoption by PADA of a properly thought-out investment strategy will be essential in order to help scheme members accumulate worthwhile retirement funds. A public commitment to the adoption of an appropriate investment strategy will also serve to give confidence to prospective scheme members, and their advisers (if any), that membership of the new scheme will or could be in their financial interests. Confidence in the ability of the new scheme to make the best possible use of the funds available to it will be especially important given the limited financial resources of many individuals in the target market.
Our responses to specific consultation questions posed in the consultation paper are set out below:
Q 2.1 What member characteristics do you think should influence the design of the personal accounts scheme?
The findings on attitudes to risk are significant, demonstrating that there is a generalised sense of caution among members of the target market as regards the approach to investment that they would choose for themselves. The most telling statistic included in the paper, though, is that 50% of individuals in the target group have savings totalling less than £5,000. Given the low level of contributions likely to be made by such individuals, and the small funds they are likely to be able to build up, we believe that the Corporation should be prepared to adopt a bolder, albeit responsible, approach to investment risk than is suggested would be preferred by individual respondents to the survey.
Q 2.2 What conclusions should PADA draw about its future membership?
As well as the characteristics set out in paragraph 2.33 of the paper, the likelihood must be that many individuals in the target market will have irregular patterns of contribution, which will affect not only the amount of pension that they might be able to build up but also their ideas as to whether saving via personal accounts will be in their interests.
Q3.1 Where should the balance be struck for the personal accounts default fund?
It is in our view consistent with the nature of the proposed default fund that it should be managed in accordance with what the Trustee Corporation itself considers to be in the best interests of the members generally. In doing this, it is reasonable for it to take into account the element of compulsion which is inherent in the new system. That element has been included in the new system because of the perception that individuals in the target market either do not wish or do not feel competent to make decisions regarding their membership of the new scheme. It is also, we feel, reasonable to suggest that the element of compulsion associated with personal accounts makes it all the more desirable that the scheme should seek to satisfy the interests of all the members of the scheme, rather than a notional median group.
Q3.2 How should the different contribution profiles of members affect the scheme's investment objectives?
The cautious attitude towards risk of the target market, across ages and income bands, must be taken into account in determining investment strategy. We would not, however, argue that this should necessarily mean that the Trustee Corporation should adopt a conspicuously cautious approach to investment: it is likely that the figures quoted in the document reflect a natural cautiousness on the part of those who do not currently invest, a feeling which may well be exacerbated by recent events in the financial sector. A balance needs to be struck between meeting the target market's apparent preference for prudence and the need for the Trustee Corporation to try to make the best possible use of the fund's resources in the long-term interests of all the members. In this context it should be accepted that the achievement of the latter objective will probably have to involve the adoption of a higher threshold of risk.
3.3 What should be the overarching objective of the default fund?
We suggest that the most appropriate objective to adopt would be to identify some sort of benchmark return. The virtues of adopting the benchmark approach would be that it would, firstly, enable the Corporation to set targets and monitor progress and, secondly, help the Corporation to explain to members what the scheme is trying to achieve and how it is performing. This latter goal is in our view significant given the desirability, already stated, of inspiring confidence among members and prospective members.
What measures should the Trustee Corporation take to ensure that members have confidence in the scheme?
As occupational schemes are required to do, the Trustee Corporation should keep its investment strategy under regular review and undertake periodic re-assessments of the attitudes of its members towards risk and other relevant factors. It should then be prepared to take this information into account on an on-going basis in managing the strategy. But there are only two sure ways of inspiring confidence about personal accounts on the part of members. Firstly, the scheme must be administered effectively and efficiently so that members' direct experience of the scheme is positive. And secondly, the Corporation must invest the scheme's assets so successfully, taking into account prevailing market conditions, that it can be fairly demonstrated to individual members, on an on-going basis, that their membership of the scheme has been and is likely to continue to be in their best financial interests.
How can the Trustee Corporation communicate to members in terms they can understand?
We recognise the need identified in the paper for the Trustee Corporation to communicate with scheme members in a straightforward and understandable way. It should be possible to present members with key data regarding their contributions and accumulated funds. But there will always be limitations as regards what can be achieved in the context of making information on pensions accessible and we do not consider it to be feasible to reduce information regarding pension scheme performance to a level which is readily understandable by all. Also, while it is absolutely correct that there should be accountability to scheme members, the experience of existing schemes is that few members actually read even that information which is presented to them in summary form, for their benefit. Given that the whole system of personal accounts has been designed to address and overcome the problem of member inertia, we do not think that the Corporation should spend inordinate time and effort on trying to communicate complicated technical information to scheme members on a standard basis.
Q3.6 Are different approaches to sharing risk worth pursuing for personal accounts?
We think that the scale of the resources that will be available to the Corporation should enable some form of smoothing to be considered, given the likely size and heterogeneity of the scheme membership and the likelihood of there being irregular patterns of contribution. This would be on the condition that this can be achieved within the single default fund - the creation of multiple default funds would not in our view be a cost-effective solution, bearing the cost constraints which are a key element of the scheme as a whole.
Q4.4 What should be the balance between active and passive investment management?
It is clear that active fund management cannot guarantee a higher level of performance than could be achieved on a passive basis. Selection and monitoring of active managers can also be a time-consuming and expensive business. On balance, though, we believe it would be appropriate for the greater emphasis in this case to be on active management. This approach would potentially offer the scheme more flexibility in taking advantage of new investment opportunities. It would also, in our view, be more conducive to the successful management of a diverse portfolio, which should include investments in many different asset classes and geographic and market sectors.
What approach should the Trustee Corporation use to identify active fund managers who are likely to outperform?
Just as the value of investments can and do go down as well as up, it is not possible to predict with certainty which active managers are going to provide above-average returns in the future. As the document states, it is all too common for new managers to be appointed on the basis of a past record of success only for their performance to decline post-appointment. All that trustees can do is to assess the past performance of different managers and make a judgement as to whether, should they be appointed, they are likely to be able to maintain their past level of performance or improve on it. In practice, trustees will consider additional factors over and above the firm's published record of returns. This will include consideration of the internal stability of the candidate firm, especially in relation to key personnel, its experience of the sectors in which the trustees wish to concentrate (if any) and the level of its empathy with the trustees' overall investment strategy. In the case of the Trustee Corporation, there is likely to be little doubt that it will be a very important client for any active management firm, and thus can be satisfied of a high level of attention. But there can never be any guarantee of performance.