UK - The Royal Society for the Encouragement of the Arts Manufacture and Commerce (RSA) has confirmed it intends to develop a business plan for a new low-cost pension fund which it believes will fill a gap in the market.

In its report 'Tomorrow's Investor', the RSA claimed the industry needs new ideas if it is to "work our way out of the impending pensions meltdown", as the research suggested people are detached from the management of their savings, with many not realising that charges and fees can cost 40% of the value of the pension.

"There is a gap in the market - a market failure, even - when it comes to products that are both low cost and high accountability. This gap need not exist to the extent it does," said RSA.

Instead, initial work conducted by the RSA suggested it is possible to create a "delegated structure along the lines of best practice in other countries", as the body pointed out institutional investors in Sweden and Holland can "provide the primary elements of a fund" -fund management, administration and basic ownership responsibilities - for less than 0.5% a year.

The RSA argued "this must surely be possible in this country", although it admitted there is an issue of trust as many investors have a lack of faith in financial institutions which "will only have been confirmed by recent events".

That said, the report argues a fund could be set up as a social enterprise, rather than a private one, in an attempt to foster trust, and asks whether it would be possible to associate it with a "widely known and trusted public body".

The RSA revealed it intends to spend the next five months on the business plan, led by David Pitt-Watson, founder and former chair of Hermes Equity, to offer investors "a highly transparent, accountable, low cost fund with reasonably secure returns at a decent level of risk".

It added although selling, set-up and persistency costs will remain, these can be removed through structures such as auto-enrolment, which is being introduced alongside personal accounts in less than four years.

The report acknowledged the planned introduction of personal accounts in 2012 as a "giant step forward", but it warned the scheme "may have a tricky birth" as it claimed the Personal Accounts Delivery Authority (PADA) is a government body and as such it "may be constrained", for example, by a requirement only to serve people on low incomes, or by the fact it will not be able to test its fund management structure.

However, the RSA report admitted PADA's task is of "immense importance", and said trying to make personal accounts a success is a "worthy aim" so the business plan could involve supplementing PADA's work, or "might involve innovating beyond regulatory constraints" in an attempt to "help as best it can".

The RSA report also highlighted the problems of a lack of investor engagement, by both individuals and pension funds, which it claims helped play a part in the current financial crisis, along with the potential for people to be overloaded with too much information.

It argued despite the shift from defined benefit (DB) to DC schemes, members still have the "final salary mindset" in which they make contributions and rely on the scheme to provide a secure retirement income.

It warned people are "badly prepared for taking on the risks and responsibilities inherent in DC schemes", and recommended the use of more long-term investment strategies.

Matthew Taylor, chief executive of the RSA, said: Over the last 20 years people have been paying more money for worse performance. If we are going to avoid a pensions meltdown then we need to make sure the investment chain works for the people who really own it."

"The financial system has for too long been focused on short-term gains at the expense of long-term stability. This report calls for pension funds to act in the best interests of ordinary people, cutting costs and ensuring transparency and accountability," he added.

If you have any comments you would like to add to this or any other story, contact Nyree Stewart on + 44 (0)20 7261 4618 or email nyree.stewart@ipe.com

Topics