Personal Accounts will become the benchmark for the pensions industry, says Legal & General Investment Management (L&G).

Ian Richards, head of DC Strategy at L&G, explained that with political support for the concept, if not the detail, of Personal Accounts, they are almost certain to happen. He added that the 2012 initiative could also be a positive move for the public sector: "If the political view is serious about addressing public sector pensions they are going to need a solution. Personal Accounts may form part of that or act as a catalyst in 2012. If [the Government] wants to suggest something they need to do it in the early part of their term."

Full of praise for the Personal Account Delivery Authority's (PADA) consultation paper, Building Personal Accounts: designing an investment approach, which addresses issues common to all defined contribution (DC) schemes, Richards added: "As an industry we are saying there is a problem with DC. Personal Accounts are raiding straight into this problem."

Richards highlighted a key risk that PADA has addressed in its research, of the design of the investment default option. "Auto-enrolment means that all schemes will need to have a default fund and it is most important that the design of that fund is the best that it can be since inertia is likely to mean that once in, few members will leave." However, with no legacy issues, a huge scale on which the product will operate and the most up to date research and thinking from a plethora of experts, he is confident in Personal Accounts' advantages.

Richards also said that he believes Personal accounts will make use of target date funds. "It should be much easier to administer, and they have got the scale to drive the costs for it down," he said.

Richards also highlighted two impacts that the launch and its run up hold for investment managers: "The opportunity is - can we get to manage some of this money? The core of it is going to be index funds, to enable them to deliver the 50 basis points charge that they are targeting." He said Personal Accounts will no doubt use core satellite approaches, as well as core index and diversification, possibly into property and infrastructure. "It is a big opportunity for a limited number of managers. For the remainder, it depends on what happens to the pensions market as a result of Personal Accounts. There is a significant possibility that many employers will look at Personal Accounts and say they are either going to put everyone into them, or there will be a number of others who will see this as a value - they may want to pay double the contributions that Personal Accounts does; but why not take advantage of the low fee [that they offer] and use them as a top-up to pensions?"

He said this approach would serve to separate employers and their job offers. "But I think there will still be a thriving DC market that investment managers will be able to buy into, but at significantly lower costs than before."

- Pensions Age July 2009

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