UK -Talk of the UK government's National Pension Savings Scheme (NPSS) restricting savers primarily to index funds has provoked fears for their market resilience.
Adair Turner (pictured), Pensions Commission chair, surmised the NPSS might offer savers six to 10 core tracker funds, arguing the scheme was designed for people of modest means, so low charges and a base income replacement took precedence.
But Andy Green, European director of consulting at Mercer Investment Consulting, warned index tracking had associated risks and recommended a broader range of active strategies to meet investors’ objectives.
“In the 1990s we saw a drift towards higher allocations to indexation because the active managers weren’t seen to deliver added value,” he said. “But in the bear market of 2000 to 2002 those index tracking allocations lost money and fell in line with the market.”
David Harris, managing director of TOR Financial Consulting, described Turner’s reasoning as paternalistic and blinkered. “He only talks in charges not rates of return. In Australia younger workers are encouraged to go into riskier products.”
There was scope to squeeze in alpha, even on a low budget, said Rick Lacaille, CIO Europe at State Street Global Advisors. “It just means you have a large proportion of passive and a small proportion of active,” he said, adding that effective manager selection would be key if active strategies were incorporated.
Turner stressed more sophisticated savers could take advantage of the private market, and suggested the new system might include a separate space directly linked to fund managers where savers could access more active or tailored products.
Kevin Wesbroom, senior actuary at Hewitt Associates, said these could include guaranteed-type funds.
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