Taking stock

The Personal Accounts Delivery Authority (PADA) seems to be well on its way to setting out the framework for the new national pensions saving scheme, says Nadine Wojakovski

Back in January, the Personal Accounts Delivery Authority (PADA) launched its first consultation paper – on choosing a charging structure to pay for the set-up and running costs. It proposed a number of ways for charges to be deducted – namely an annual management charge (AMC), a contribution charge, a joining fee or a combination of a lower contribution charge with an AMC.

To date there have been some definitive responses from within the industry on how it believes the charges should be implemented. The Investment Management Association is calling for a structure based on an AMC which it believes is a fair and transparent charge which will help to encourage individuals to remain in the scheme.

Xafinity Paymaster, who looked to Sweden for its solution, believes that the most workable model would be a combination of a contribution charge and an AMC with an element of capped charge. It is keen for the Government to adopt a structure similar to the one used by the Swedish Premium Pensions Scheme (PPM), arguing that this mechanism will ensure that each member pays the lowest possible charge and hence is the fairest for members.

PADA has conceded that in arriving at a decision "some difficult trade-offs will have to be made" and what this entails will be seen when it publishes its response in the coming weeks. Following on from its first consulation there are two more in the pipeline – one will look at fund structures and investment choice and the other will look at the scheme's rules.

In the meantime, pensions professionals are mulling over the broader implications of personal accounts and looking at what they may need to consider in the run up
to 2012.

EU clarification
One announcement that has been met with a considerable sigh of relief is the EU's decision to allow auto-enrolment to be extended to insurance-based workplace pensions from 2012 – effectively meaning that wider access to good quality pension provision will still be available.

Up until the announcement there was a concern that EU legislation would prevent automatic enrolment into contract-based (workplace) schemes. As a result some employers were considering if they should give up their group personal pensions as they were concerned that when personal accounts arrived they would have to close the existing arrangements.

"It is good to have clarification that they can continue with their current provision or set up new schemes and that they won't have to enrol their employees into personal accounts," says Gareth Evans, head
of corporate affairs at the Royal London Group.

Senior consultant at LCP Tony Bacon notes the importance of this decision saying that without it there would have been a "dumbing down of benefit provision" which the Government says it is committed to avoiding.

Now he says that employers who are grappling with the best way to address the increased pension expense imposed by personal accounts will at least now have the flexibility to look for solutions across a level playing field, whether they be workplace personal pension schemes, trust-based occupational pension schemes or participation in the new schemes.

The NAPF, in particular, welcomed the decision. Said NAPF chief executive Joanne Segars: "This issue had been the elephant in the room for far too long and now it has been resolved, we can move forward.

Obstacles ahead
While the EU decision may have laid to rest one of the big concerns over personal accounts and silenced some fearmongers, there remain plenty of critics who, at this stage, feel there are still huge issues to be overcome. Principally, they fear the complexity of a new administrative system, the excessive costs, the ‘ambitious’ implementation date of 2012 and the impact it will have on current provision.

Indeed personal accounts were recently called a "disaster in the making" by some commentators in a recent debate on pension provision hosted by Pointon York Sipp Solutions. Participants agreed that the proposed minimum employer contribution level of three per cent and employee contribution of four per cent were woefully inadequate. They also argued that the auto-enrolment of employees, with their ability to subsequently opt out, was fraught with difficulties.

Looking from the employers' perspective, principal at Towers Perrin David Bird believes that those offering quality pension provision face quite serious issues. Thanks to the extension of auto-enrolment to work placed pensions employers will face an increase in membership which could result in substantial cost increases.
"If clients have to face increasing cost then maybe they cannot afford their current provision," he notes. "This leads to the debate about levelling down and a consideration of reducing employer contributions."

As a result employers need to step and consider the options, which is particularly complicated for those offering a variety of pension arrangements. "It's a fact-finding mission to really understand the scope of how personal accounts may effect their organisation, if they are indeed thinking about it all," offers Bird. On the positive side he notes that PADA appears to be in good hands with Paul Myners as head and Tim Jones as its chief executive.

Tony Barnard, technical consultant at Gissings, is concerned about the prospects of building a massive infrastructure from scratch and ready for 2012. He says that based on the Government's sorry track record of implementing the child support agency, he welcomes the news that it is not embarking on this mammoth task this time. Instead, he says there are probably just two companies with the expertise to undertake the building of the infrastructure suitable for potentially seven to eight million members.

At the moment Barnard thinks PADA is a "terrible waste of money" as so much has been spent on just talking about it. He is referring to figures for consultants' advice that is said to have run into millions for less than a year's work. "The insurance companies have the systems in place to handle massive numbers of scheme members so why not use existing systems rather than start from scratch?" he asks.

Robin Ellison, head of strategic development of pensions at law firm Pinsent Masons, believes that PADA is a strategic mistake. "Adair Turner should have gone further in simplifying the existing state pension systems instead of introducing a new one," he offers. "The main object of the exercise was to help people at the lower end of the scale and there is a big question mark whether PA is going to achieve this.

"Secondly, if the Government does go ahead and introduce personal accounts, Ellison seriously questions whether it will work. "No-one has built a computer system of this size and complexity before and the track record of government computer systems is mixed," he says.

He also points out that the potential for individual complaints will be extraordinarily high and policing a system with so many members will be difficult. What’s more, he argues that the start date is ambitious and questions whether the estimated costs of around £11 billion is an appropriate use of state resources.

Hurdles remain
The notion of personal accounts may have come a long way since they were introduced by the DWP as a "new way to save" in 2006, but there are still many
hurdles ahead.

There is still a lack of concrete information available and many are in agreement that the road ahead is daunting. That said, as the Pensions Bill is due to be finalised in the very near future more details will emerge and more effective planning can begin.

On the other hand there is also the very real possibility that there will be a change of government at the next general election – which could lead to the shelving of the scheme. Says Barnard of Gissings: "Although the Conservatives are saying ‘yes’ at the moment, with the amount of money being spent on it, it is questionable whether they will continue to support the initiative."

- Pensions Age June 2007