The recent RSA-sponsored article on pensions sets out a proposal combining inexpensive, compulsory investment and shareholder activism. However, as well-meaning as it is, it over-simplifies many important issues and misses several more.

It is based on the personal accounts plan, due to be introduced in 2012. In broad terms, it recommends a large, low-cost, pooled fund which invests compulsory contributions in investments which reduce in risk as individuals near retirement. It also recommends that the investors be allowed to influence the management of the companies in which they invest.

The first issue here is the issue of asset allocation. The lifestying approach – where the funds are moved from high risk investments such as shares to low risk assets such as bonds and cash – is advocated because investors take more risk when they have a longer time horizon. This is only sensible if investors will actually change the amount they contribute in response to investment performance. If there is a large fall in the equity market and still 30 years to go before retirement, the additional contributions required to meet the shortfall are probably managable. However, it would be impossible to compensate for such a fall if it happened only a year before retirement. In practice, though, most investors in personal accounts will not anything over the compulsory contributions. In this case, lifestyling is sub-optimal. This is because it concentrates the investment risk over a shorter period, reducing the diversifying effect that you get from holding the same portfolio over a longer time period.

The research also attempts to address the issue of corporate governance, starting with a comment on the role of occupational pension schemes. These institutions have been implicated in the global financial crisis through their role as shareholders. In particular, they have been accused of failing to supervise the companies in which they invest. This criticism is not new – the 2001 Myners Review made exactly the same point. The citizen investor fund is intended to solve this problem by allowing individual investors to vote on corporate resolutions. This could mean individuals having the opportunity to vote on many resolutions for hundreds of firms, implying a level of engagement that is simply not practical. Even if broad voting rules were used so that this could be avoided, it suggests a level of knowledge on corporate governance issues that most people simply do not have. The research even attempts to justify this approach through the “wisdom of crowds” argument, that the views of a large number of people can be usefully aggregated. There is already a mechanism that does this – the market.

This research also fails to address the key issue: that increasing longevity and falling investment returns have increased the cost of retirement by so much that much more fundamental changes are needed to avoid mass pensioner poverty. Retirement ages need to increase significantly, and much more money needs to be going into pensions, whether it is through higher taxes or significant compulsory contributions.