Investment guarantees for personal accounts
Working Paper No. 62
David McCarthy
The Pensions Act 2008 set out a series of measures aimed at encouraging wider participation in private pension saving. The aim of these reforms is to overcome the decision-making inertia that currently characterises some individuals' attitudes to pension saving and to make it easier for individuals to save for their retirement. The measures set out in the Act include a duty on employers to automatically enrol their eligible employees into qualifying workplace pension provision and to provide a minimum contribution towards the pension saving for those employees who participate. This duty will come into force from 2012. The Pensions Act also allows for the establishment of the personal accounts pension scheme. This will be a trust-based defined contribution occupational pension scheme that employers must use if they do not have or do not wish to use, their own qualifying workplace pension scheme. The personal accounts scheme will be run at arm's length from Government by a body corporate acting as an independent, not-for-profit, trustee for the scheme.
This paper discusses whether investment guarantees would be suitable for the personal accounts scheme. Guaranteed funds can operate in different ways but typically, the capital invested and a minimum level of return are guaranteed. However, as a trade-off for the guarantee, there would be a loss of return over and above the minimum level. The paper uses an economic model of optimal lifetime savings and consumption to assess whether guaranteed investment vehicles would be appropriate for the personal accounts scheme (rather than other qualifying workplace pension schemes). To assess the demand for guaranteed investment products, the paper builds an economic model of an individual's lifetime investment and consumption behaviour.
May 2009
ISBN 978-1-84712-512-5
Investment guarantees for personal accounts (large file 15MB)
Note: this is a large file so the report is also supplied here divided into six smaller files.
file 1 - bibliographic details, summary and chapters 1-7