Compulsory additional pension savings – guidelines for low-risk fund management

1. There will be an annual choice between 20 branded funds with different investment mixes and fund managers. Information will be provided to taxpayers in a standard format. The Inland Revenue will then direct deductions to the individual's chosen fund. National Savings will be the default fund manager.

2. Funds will be expected to grow faster than inflation but with low investment risk using cash savings accounts and index-linked deposits alongside investments in bonds and equities. Accounts will not be subject to capital gains tax or income tax*. The full balance of the account will be available on retirement. (*But accounts will be funded from after-tax income).

[Click here for proposals for high risk investment.]

3. Managers will be allowed to make an annual charge but the level will be published, compared with alternatives and with the rate of return. One option will be for a manager to set out a max-to-min range of percentage charges with the actual level being determined by the performance achieved. Managers could also choose to make no charges, for example if the main part of their offer was a simple high interest deposit account.

4. Initially, institutions will apply for the chance to manage one of the 20 funds, setting out their proposed approach. The 20 successful institutions will be selected on the basis of their proposals and recognising the need to offer a choice (but all will be expected to offer low risk management).

5. A review of performance will be undertaken every 3 years. The worst performing institutions will face three levels of sanctions. Firstly, they would be asked to propose new managers, new investment strategies or new component investments. Secondly, a fund would be barred from accepting new investments; a place on the panel would be regained only on the basis of improved performance. The final sanction, transfer of funds to another manager, would be reserved for only those managers with very poor performance over 5-10 years - in particular any failure to keep pace with inflation.

6. Institutions will also compete to offer component investment products to the 20 primary managers and will compete for any panel vacancies that might arise (ideally on the basis of the performance of a nominated shadow product).

7. There will be a requirement that, within the range, there are at least 2 ethical investment options. However, in order to manage risks, pure ethical options would only be constructed by placing a large proportion of investments in deposit accounts and national savings. In the other 18 funds, institutions would also be encouraged to include an ethical investment component.

8. Although there will be potential for over-performance, the emphasis here on modest returns will help restore the perceived link between what people put into their pensions and what they get out.