Investment strategy of Auto-enrolment

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Dave Vanian

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I'm a bit unclear about how the pooling of financial returns will be achieved. I think it means that if there are 4 investment managers, each one has to offer the four fund choices. If a punter decides to go with "Moderate risk", it looks like the CPA will split their contributions 25% each to the Moderate risk options of the four investment managers. Would that be your understanding?

Agreed on Minister Humphreys and her achievement of actually moving this along. I'm sure there will be critics of the details, but she's made progress.
 
Dave Vanian said:
I think it means that if there are 4 investment managers, each one has to offer the four fund choices. If a punter decides to go with "Moderate risk", it looks like the CPA will split their contributions 25% each to the Moderate risk options of the four investment managers. Would that be your understanding?
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Yes, that's my reading of the proposal.

Personally, I think it would be more efficient to appoint a single manager for, say, 6 years following an open competition. It would certainly reduce the administrative complexity (and costs) of running the scheme.

I think the default option should be a series of passively managed, target date funds with a glide path agreed with the Department. Perhaps this is what the Department has in mind.

I don't have any objection to offering members of the scheme the alternative option of an aggressive, balanced and conservative fund in addition to the default option. It might also be appropriate to offer a Sharia law option and, perhaps, a "dark green" sustainable investments fund.
 
I have extracted the relevant pages on the attached
 

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Sarenco said:
Yes, that's my reading of the proposal.

Personally, I think it would be more efficient to appoint a single manager for, say, 6 years following an open competition. It would certainly reduce the administrative complexity (and costs) of running the scheme.

I think the default option should be a series of passively managed, target date funds with a glide path agreed with the Department. Perhaps this is what the Department has in mind.

I don't have any objection to offering members of the scheme the alternative option of an aggressive, balanced and conservative fund in addition to the default option. It might also be appropriate to offer a Sharia law option and, perhaps, a "dark green" sustainable investments fund.
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The fund managers will have to be compliant with the Sustainable Finance Disclosure Regulations anyway. Not a bad idea to just offer ESG funds with different risk ratings. It won't be too long until that are the main options that European investors will have.

Good shout on target dated. Simple 100/0, 75/25, 50/50 and cash weightings.
 
Steven Barrett said:
The fund managers will have to be compliant with the Sustainable Finance Disclosure Regulations anyway. Not a bad idea to just offer ESG funds with different risk ratings. It won't be too long until that are the main options that European investors will have.
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Fair point.

I think the most important thing is to get the default option right - that's where the vast majority of contributions will end up.
 
There should be only one fund with a smoothed return as suggested by Colm Fagan.

My proposal for one fund with a smoothed return

I nearly wept this morning, hearing Regina Doherty on RTE with Rachel English, going over old ground of people having to decide whether they want to be low, medium or high risk; what happens if markets tumble on the day people retire; the carousel (probably one of the most ridiculous concepts...
www.askaboutmoney.com
 
Sarenco said:
Fair point.

I think the most important thing is to get the default option right - that's where the vast majority of contributions will end up.
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Reading through the report now. If the money is going to be split, they want to ensure the lifestyling option is done the same way. Currently, different fund managers have different trigger points for moving to less volatile assets.

There's also the argument over the automatic sell off of equities to buy bonds based on age. We have seen over the last few years that equities generated the returns while bonds struggled to generate anything.
 
Steven Barrett said:
If the money is going to be split, they want to ensure the lifestyling option is done the same way. Currently, different fund managers have different trigger points for moving to less volatile assets.
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Yeah, that's one of reasons why I think it would be more efficient for a single manager to be appointed for a number of years, following a competitive tendering process.
Steven Barrett said:
There's also the argument over the automatic sell off of equities to buy bonds based on age. We have seen over the last few years that equities generated the returns while bonds struggled to generate anything.
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That's a bigger debate!

A typical target date fund (TDF) might start with a 90/10 allocation to equities/fixed income when an investor is young, glide to 50/50 at retirement and then plateau at 30/70 once the investor is 10 years into retirement.

Alternatively, you could simply use a 60/40 allocation for life, as the average allocation throughout the above glide path to produce a similar outcome. You could even argue that a fixed allocation for life is superior to a glidepath as it relies on less assumptions regarding the source and timing of returns.

My personal preference for the AE scheme would be for a series of TDFs, largely because I believe investors become psychologically more risk-adverse as they age. However, I really wouldn't have a major issue with using a fixed 60/40 allocation of index funds for life.
 
Sarenco said:
I don't have any objection to offering members of the scheme the alternative option of an aggressive, balanced and conservative fund in addition to the default option.
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Thinking about this and bearing in mind that there seems to be no advice involved, I can see a potential problem here. Without advice, after a few good years of performance lots of people start piling into the aggressive fund choice, based solely on its past performance. Then a big correction occurs and it drops by 25%. Newspapers have a field day writing about "€1 billion wiped off the value of the Government's auto-enrolment scheme". Lots of people believe that they've been sold a pup, that the Government scheme is a "rip-off", comparing it to Eircom shares and so on.

I'm a broker and so this comment might appear to be self-serving. But I sincerely think the above is just one example of why advice is absolutely necessary and it's not a good idea to try to sell investments of any kind as mass-market off-the-shelf products without advice. The good people of Askaboutmoney may well understand the basic principles of investing and be well able to choose wisely without any advice. But in the main, they're not the target market of the auto-enrolment scheme.
 
Dave Vanian said:
Thinking about this and bearing in mind that there seems to be no advice involved, I can see a potential problem here. Without advice, after a few good years of performance lots of people start piling into the aggressive fund choice, based solely on its past performance. Then a big correction occurs and it drops by 25%. Newspapers have a field day writing about "€1 billion wiped off the value of the Government's auto-enrolment scheme". Lots of people believe that they've been sold a pup, that the Government scheme is a "rip-off", comparing it to Eircom shares and so on.
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It’s a reasonable point but (IIRC) something like 95% of members of the AE scheme in the UK simply stick with the default option (which, by definition, has to be an off the shelf product).

Provided the default option is a series of well constructed target date funds or a balanced fund with a fixed lifetime allocation, there shouldn’t really be a problem with offering a narrow range of alternative fund options IMO.
 
But shipship's point is valid.

Can they not put it out to tender and then award it to Vanguard? Cut out all the messing with multiple providers.

Brendan
 
Interesting bit is that any company that tenders for the investment management services bit can't tender for for the fund administration/Transfer agency piece. So they are capping the management services piece at 0.5% management charge but the fund administration and other pieces aren't free either. A lot of the large companies will offer these services almost at a loss to win the investment side of the business. This won't happen here. I don't really get the 4 companies either. They say it is to drive competition and yet be able to provide efficient oversight. I don't see what competition they are driving. No company is going to bid at less than the 0.5% management charge.
 
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Would it not be better to tie in with a professional fund manager like Zurich for the selection of funds rather than a new government body to select investments for a fund.
I wouldn't have much confidence in the ability of a new government body to design a pension fund themselves. The management of what's left of the irish sovereign wealth fund leaves a lot to be desired
 
joe sod said:
Would it not be better to tie in with a professional fund manager like Zurich for the selection of funds rather than a new government body to select investments for a fund.
I wouldn't have much confidence in the ability of a new government body to design a pension fund themselves. The management of what's left of the irish sovereign wealth fund leaves a lot to be desired
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There are plenty of independent investment consultants out there with the resources to evaluate the funds on offer following the tender and pick four for each category. I certainly hope that the Government will enlist the services of qualified and experienced people to do this.

That said, up to a point it does feel a bit like the Government re-inventing the wheel.
 
Brendan Burgess said:
But shipship's point is valid.

Can they not put it out to tender and then award it to Vanguard? Cut out all the messing with multiple providers.

Brendan
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Vanguard aren't the only provider of target dated funds. And they aren't only passive either. And they aren't always the cheapest.

But the do have the best PR ;)
 
Sunny said:
Interesting bit is that any company that tenders for the investment management services bit can't tender for for the fund administration/Transfer agency piece. So they are capping the management services piece at 0.5% management charge but the fund administration and other pieces aren't free either. A lot of the large companies will offer these services almost at a loss to win the investment side of the business. This won't happen here. I don't really get the 4 companies either. They say it is to drive competition and yet be able to provide efficient oversight. I don't see what competition they are driving. No company is going to bid at less than the 0.5% management charge.
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All the life companies do investment only group pensions with the likes of Mercer, Aon, Invesco etc doing the admin. The fund manager is just sent a lump sum of money each month and instruction on which funds to invest it into. They don't have any member names and they do no scheme admin. The amc for most of the funds offered under these schemes are less than 0.5%.


Steven
http://www.bluewaterfp.ie (www.bluewaterfp.ie)
 
Yeah but the AMC does not include your fund admin, trustee or transfer agency costs which are covered as expenses out of the fund and are included in the NAV. Many of the larger international fund managers who would be very interested in a mandate of this size like State Street and BNY often sell their business on the basis that if they win the investment mandate, they will often run the other services like Fund Accounting at a breakeven or even a loss.... These firms are now precluded from doing this. It's not wrong. I just don't understand why they would tell the largest firms, if you win the investment mandate, you can't win the admin mandate and vice versa.

Maybe splitting everything out is the most competitive way but I have my doubts.
 
It is not disclosed in the documents what the 0.5% will have to cover. I imagine the minister doesn't know either at this point and it will be disclosed in the tender document.
 
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