The proposals follow on from Standard Life feeling the wrath of advisers and investors earlier this year after failing to clearly detail the assets in its “cash” fund – namely the significant holdings of toxic mortgage-backed securities.
The ABI’s new sector would work in parallel with the existing money market sector but would apply stricter limits on the type of instruments the funds can invest in and their maturity.
It follows the trade association’s earlier suggestions in February which floated the idea of an additional sector for funds which genuinely invested in cash rather than money market funds that invested in money market instruments close to cash.
Consultation for the new fund sector will close on May 8 and if approved it is hoped the extra category will safeguard consumers against unexpected losses by helping them identify funds that have a greater focus on capital stability.
The ABI says it will be making a wider review into all sectors to ensure they serve the needs of consumers and advisers.
ABI director of life and savings Maggie Craig says: “This initiative is in direct response to what consumers and advisers have been telling us they want. With volatility in the markets many people want to easily choose a stable way to invest their money.”
Cash funds have long attracted pension investors who are approaching retirement and looking for a “safe haven” to safeguard their savings from volatile movements in the equity markets.
But news that Standard Life’s cash fund had been exposed to short-term loans and asset-backed securities linked to the mortgage market rather than being invested in bank and building society deposits sparked public outcry for an official review of the sector.
Standard Life’s pension sterling fund, which had over 40 per cent invested in mortgage-backed securities rather than being “wholly invested in cash” as its literature suggested compensated customers who had invested in the fund after it was revalued last December.
Standard was not alone, with both Prudential and Zurich exposed to mortgage-backed securities.
Pru, which was found to be holding more than a fifth of its £222m cash funds in mortgage-backed securities and corporate debt, insisted that the holdings and composition of its funds had been spelled out to investors.
Meanwhile, Zurich’s £375m fixed-interest deposit pension fund had 10 per cent invested in commercial and residential mortgage-backed securities and its £86.5m fixed-interest deposit life fund had almost 5 per cent in mortgage-backed securities and 2.5 per cent in other corporate floating rate notes. It used around £18m of shareholder cash to plug a 4 per cent hole in the funds.
The Investment Management Association has welcomed the ABI’s proposal to introduce a new “cash-like” money market sector definition and expects the review of its own money market sector to conclude towards the summer.
As part of the review it is considering whether to adopt European-wide sector definitions and any other changes which emerge from the European review to minimise confusion for UK consumers.
But it says this will depend on how many funds could populate the new sector as there are currently only 32 funds across the whole IMA money market sector.
IMA head of sectors Nicola Kembey says: “We believe that this work is essential both to support the integrity of the funds in the sector, and to ensure that consumers understand what they are buying when investing in a fund with this label, regardless of their country of residence.”
Bestinvest senior investment adviser Adrian Lowcock says: “In hindsight it should have been done a long time ago but weak bear markets will always flag up improvements in areas that we can all work to.”
“They are doing the right thing but it’s critical that it makes it clearer and easier for investors to understand. The follow-up to it is not just announcing it and doing it but actually educating IFAs who can then help investors.”
Hargreaves Lansdown pensions analyst Laith Khalaf says the new “cash-like” money market sector is a sensible idea and will provide an easy division between funds which are looking for higher yields and safer funds.
He says: “You have two types of funds in the money market sector, “safe havens” that invest in lower yielding investments and those that are chasing yields that invest in more risky assets.
“Most pension investors are probably putting their money into money market funds thinking they are a “safe haven” that invest in cash or cash-like investments so if they do introduce a “cash-like” sector more funds will try and enter into it.”
But Khalaf says funds which are left out of the new sector may struggle to attract interest from pension investors as they are more likely to want to stick with a lower risk investment strategy.
He says a sector overhaul may cause upheaval as there is a significant amount of money already invested and going into funds classified under the current money market definition because of lifestyling arrangements and a restructuring of the system would be needed.
He says: “Companies will need to decide in their lifestyling approach whether they want to go into the safer funds, and they probably should and they’ll have to implement that as well.”
“It’s probably quite late in the day to be introducing this but it’s probably better late than never.”