AEGON welcomes today’s Pensions Bill as another important step towards the introduction of Personal Accounts in 2012. However the likely success of pensions reform, including Personal Accounts in getting more people to save more money can’t be judged without more detail in certain areas. AEGON believes Personal Accounts must be designed with the target market of low to moderate earners, who aren’t already saving for retirement, firmly in mind. AEGON is calling for a simple qualifying test to exempt employers with good existing pension schemes from having to pay into Personal Accounts and resolution of the means testing issue.
Rachel Vahey, head of pensions development, says:
Personal Accounts is a huge social experiment and the government’s pension policy must be made to work fairly both for future pension savers and for the millions of people who are already saving in good pension schemes. Otherwise we run the risk of further undermining public confidence in pensions and leaving millions of people worse off in retirement than they would otherwise have been.
The answer is to keep the focus firmly on the target market. The government has taken steps towards this today in outlining the contribution limits and the Personal Account Delivery Authority’s objectives and responsibilities.
The two main hurdles still to overcome are the qualifying scheme test for existing pension schemes and the means testing issue. We must make it easy for employers to carry on offering good pension schemes or pension reform, and the introduction of Personal Accounts, won’t meet its main objective of getting more people to save more money. And means testing must not become a barrier to success. Government has a number of solutions at its disposal to do this. It could send out a clear message that auto-enrolment is a national rather than an individual issue and therefore in the ‘greater good’ of the nation or it could look at practical ways of lessening the risk of getting caught in the means testing trap.
Personal Account Delivery Authority responsibilities
The Pensions Bill gives PADA executive powers to oversee the design and implementation of Personal Accounts. The Bill will move PADA’s role from a purely advisory one to an executive one in early 2008. PADA will then have responsibilities for designing and building the infrastructure to allow automatic enrolment and employer contributions into personal accounts. Other responsibilities will include minimising the burden on employers, minimising any diverse impact on high-quality pension provision, encouraging participation and contributions in the target group, while minimising charges and delivering an appropriate range of fund choices that allows for members’ preferences. PADA will also design and implement commercial arrangements with potential suppliers, deliver the registration function and be responsible for sourcing the finance to deliver personal accounts.
Rachel Vahey, head of pensions development, says:
PADA will operate both as a non-departmental public body and a body governed by trustees, giving potential conflict in reporting lines. It will be important DWP gives PADA solid, detailed guidance rather than high-level principles to help it minimise conflict and make sure it stays focussed on designing Personal Accounts with the target market of low to moderate earners who aren’t already in a pension scheme, firmly in mind.
Financial Management of Personal Accounts
PADA has been given responsibility for the financial management of Personal Accounts, including setting the shape and level of the charges. The government has said Personal Accounts should, in the long-term, be self-financing through member charges, not dependent on the taxpayer. AEGON believes differences between actual and assumed employer and employee behaviour, such as opt out rates, could increase scheme running costs and force charges to rise. Therefore it’s vital PADA understands how employer and employee behaviour could affect the costs of running the scheme and builds in appropriate margins into setting charges levels and choice of shape.
Any timing mismatch between costs incurred and charges collected will have to be financed by borrowing. AEGON suggests a combination of contribution charge and a yearly management charge more closely reflects the timing of underlying costs and should minimise possible cross-subsidies from general taxation or the need for charges to rise in future.
Rachel Vahey, head of pensions development, says:
Personal Accounts must be self-sufficient so getting the financial management right will be crucial. We are disappointed that PADA has not been given the express power to increase Personal Account charges in future as this is a vital component in minimising the need for tax payer subsidy. Prospective investors must be told that charges could increase as well as fall. And PADA must fully understand the potential consequences of opt out rates and timing mismatches before key decisions are taken on the level and shape of charges.
Contribution cap
To increase the overall level of pension saving, Personal Accounts must complement, not compete with, the existing savings market. The government predicts that 60 per cent of the estimated £8bn a year Personal Accounts savings will be new money, the rest will be re-directed from current savings. The Pensions Bill sets a contribution cap. The level of cap will be set by an order by the Secretary of State, although the DWP has previously indicated a cap of £3,600 a year, indexed in line with earnings between 2005 and 2012, bringing it closer to a starting figure of £5,000. The Bill also makes provision for additional payments to be made above the limit, which will not be classed as contributions.
Rachel Vahey, head of pensions development, says:
A realistic contribution cap should give the vast majority of the personal accounts target market enough flexibility to make their regular payments from their salary plus other lump sums as and when they have the spare cash. We will need more information on what other payments can be made in addition to contributions to the scheme, but it is highly questionable whether additional scope is needed by the target market.
It is vital the Government sticks to its original aims and sets a realistic contribution cap closer to £3,000 to keep personal accounts focus firmly on the target market. Otherwise it runs the risk of being used by high-earning individuals to exploit an opportunity.
