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Pada draws up default lines

The Personal Accounts Delivery Authority is honing its position on what investment options it should offer future members of personal accounts.

Investment director Mark Fawcett expects that over 90 per cent of members will invest in the default fund, which is set to be cautious.

But Pada is working on a number of other options. It has set itself a limit of 15 although Fawcett admits that the body is struggling to come up with 10.

A Sharia fund, as widely forecast, is as good as confirmed but there are unlikely to be other religious funds offered. There will also be an ethical fund as well as a number of risk-graded versions of the default fund.

Fawcett says: “We have not finalised our recommend- ations but our thoughts are no more than 15 and we are struggling to come up with more than 10 different choices.

“We will have some risk-graded versions of the default fund, probably a higher-risk version for people with more risk appetite, plus an ethical fund of some sort and a religious-compliant fund.

“We will definitely have a Sharia fund, although there is less support for other religious funds so we are not sure about any others.”

Fawcett acknowledges the challenge that Pada faces in choosing an appropriate ethical option for personal accounts. He says top-notch due diligence and transparency are key to avoiding problems.

He says: “With the ethical fund, the first question is, whose ethics will the fund be based around? There are two approaches – either you screen out unethical firms or you go for best in class, for example, the most ethical oil company. We obviously want to keep it low cost so we are thinking about passive elements. There are ethical indices that you could track.

“We need to ensure we are very open and disclose as much as we can about all of our funds, not just the ethical one. We need to be clear about how they are managed, what they invest in and what people’s expectations should be. We also need to have a good due diligence process for our manager selection.

“Ethical funds are perhaps an easier target for people to dig around and catch people out. Ultimately, a big scheme like this will be in the public eye and we have to be clear what we are doing and communicate that very clearly.”

Pada has looked at the viability of a cash or cash-like fund but Fawcett is worried about the significant inflation risk posed. A potential guaranteed option seems to have been ruled out.

But the fund options that Pada does go for are likely to come at a price.

He says: “We certainly cannot guarantee that the fund options will have the same pricing as the default fund but we will make sure they are good value and will strive to keep the pricing as good as we can.

“We are aiming for 50 basis points for the default fund so the other funds are likely to be more than that.”

The default fund, while being cautious, is likely to encompass emerging markets as well as hedge funds and venture capital trusts.

Fawcett says: “We will use as many different assets including emerging markets as we think are appropriate. We obviously have a budget in terms of what we can spend on fund management fees but we believe passive will be very good value and will give us some scope to pay for active management where we think that would add value.

“Hedge funds, VCTs, commercial property – I think at least some of those will have a place in the default fund. There should be some good opportunities in a whole bunch of asset classes that were previously overpriced.”

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