Investment strategy of Auto-enrolment

[Duke of Marmalade]

On the positive side, they have ditched the concept of the providers competing for the end punter. On what basis were they going to compete? Fancy marketing is simply throwing money away. Someone mentioned that there is no need for advice - there is no need for advice on choice of provider but this is faux advice; there is surely still room for advice on matching risk profiles to the 4 fund types, though I see that being largely online possibly through the likes of AAM.
And they have done away with this ridiculous carousel for selecting your RP. As they say, everyone will get the same outturn depending on their fund type choice and if they default, no carousel is needed as there is only one default fund.
As @Sarenco says, over 95% will go for the default and it has to be lifestyling. So target date funds are required, one for each entry age and maybe also for choice of retirement age - very complex. Anyway as per Colm Fagan I think it is a huge mistake that over 95% of AE punters will spend their retirement earning bond returns.

 

[LDFerguson]

there is surely still room for advice on matching risk profiles to the 4 fund types, though I see that being largely online possibly through the likes of AAM.

Duke, I think there's a flaw in what you're suggesting here. My gut feeling is that the majority of AAM readers and contributors already have pensions of some shape or form. The AE scheme is aimed at people who have, to date, avoided contributing to a pension altogether. A very small subset of these haven't started a pension for specific reasons unique to themselves. But there's a very big portion of the target market who have avoided pensions because they simply don't understand the advantages of doing so. There's already plenty of information available online, on AAM, Citizen's Information, Pensions Authority websites, not to mention the websites of the folk selling pensions. If people haven't read the information before, why do you think they'll start now?

You and I know that someone in their 20s or 30s would be well-advised to run with a low-cost all-equity fund and forget about short-term fluctuations. Wait for the first market crash to happen that knocks 30% off the value of an AE pension fund. Who does the punter contact when s/he decides s/he wants to time the market and/or cut her losses and/or complain because s/he was never told that her fund value could fall and the Government has ripped her off etc.? Is it feasible to say that all the information was available on a website and s/he should have read it?

 

[Duke of Marmalade]

I'm sure I agree with all that LD. I was addressing the contributor who said there was no room for advice in the proposed scheme. I take that to mean that it is because there is not a choice of fund managers. I think advice on the choice of fund manager is faux. There is still room for advice on alignment of risk preferences. But you are right, AAM will probably not fulfil that role for the target constituency.

 

[Steven Barrett]

As someone who works as a financial advisor, I have been thinking of how this is going to impact on my business and I think, not very much. The income bracket of the majority of people who are in the scheme would not pay for a financial advisor anyway.

...but they may be more willing to talk to someone who will direct them towards a high commission pension product and the banks.

So the question is, which is better? To get advice but pay for it through higher ongoing fees or have no advice, pick the default option and pay lower fees (which I see the unions are giving out about already). It has to be the latter.

The other option for this bracket of saver is the execution only PRSA pension which has a charge of 1% as opposed to 0.5%. And neither of them have any advice.


Steven
http://www.bluewaterfp.ie (www.bluewaterfp.ie)

 

[Colm Fagan]

Here is what I posted on another forum (LinkedIn) on Friday, in relation to investment strategies for auto-enrolled pensions:

It is interesting to read that pension funds, bastions of long-term investing, are resisting UK government threats to force them to invest in 'risky' assets, because fear of short-term volatility trumps their desire for higher long-term returns.
The lunacy of pension investment strategies is well illustrated by 'lifestyle' investing for auto-enrolled (AE) pensions. In aggregate, AE schemes will enjoy positive cash flows for decades, so should invest for the very long-term, yet investment strategies ignore that reality. Instead, asset allocation takes place at individual member level. Contributions for young workers are invested in 'equities' (growth assets) but as they age, funds are transferred to 'bonds' ('safe' assets). At the extreme, retired members who opt for annuities are invested 100% in bonds.
The lemming-like rush to bonds as individual members age (and as their pots get bigger) happens despite the certainty of positive cash flow at scheme level. Madness.
I have proposed that AE assets be invested 100% in equities, to take advantage of the very long investment horizon, and to deal with volatility of short-term returns by the simple expedient of stipulating that individual members transact with the scheme at smoothed values, resulting in volatility levels close to deposit accounts. Everyone gains, because the equity risk premium is captured for the benefit of all: young and old, active and retired. The result is an average 70% uplift in member benefits. The full paper can be found here.
Despite my proposal winning a major award from the UK actuarial profession, the Irish government refuses to even have it evaluated in advance of implementing auto-enrolment in Ireland. Madness is not confined to sponsors of private sector pension schemes.