Warning over 'too-cautious' approach to national pension fund investment

Published on Thursday 7 May 2009 21:35

THE new national pension scheme is set to take a cautious approach to the way contributions are invested. But experts yesterday warned a risk-averse approach could jeopardise the scheme's success in boosting retirement incomes.

The Personal Accounts Delivery Authority (Pada) yesterday launched a consultation into the design of its default investment fund, into which millions of workers will be automatically enrolled from 2012.

Employees between 22 and retirement age earning more than 5,000 a year will contribute at least 4 per cent of their salary to the scheme, unless they opt out. Compulsory employer contributions will start from 3 per cent while there will be an additional 1 per cent in tax relief.

Some 90 per cent of personal account members are likely to be invested in the default fund, the focus of the discussion paper.

Pada investment director Mark Fawcett said the fund would be designed on the basis that most members would be risk-averse and have lower-than-average financial understanding. But he said other funds would be available for investors seeking additional risk.

Rachel Vahey, head of pensions development at Aegon in Edinburgh, said that with several million people likely to be enrolled into personal accounts, the default investment fund make-up would be crucial.

"The concern is the economic crisis and the fact that fear of losing money is uppermost in people's minds will lead Pada to design an ultra-cautious default fund, with little potential for investment growth," she said.

The Pada consultation process will conclude on 7 August.