Personal identity

1 October 2009 0:00 am | By Nicola York

Personal Accounts Delivery Authority acting chair Jeannie Drake says the scheme will be looking to go beyond current best practice when dealing with people’s decumulation needs.

Drake says the personal accounts decumulation phase will be decided by its trustee corporation although it will be guided by the current consultation work being done by Pada.

She says the objective of personal accounts is “low charges but high governance” and should improve on current best practice.

“For me, existing best practice is the starting block. How do we go beyond that, how can we use the opportunity of these reforms to actually take best practice beyond where it is now,” she says.

But Drake admits that the scheme will have to tackle the issue of how to offer such a decumulation service through low charges.

“How do we assist people in exercising their choices, how do we have a high standard of governance around assisting people in making their decumulation choices consistent with low charges?

“What is the process for handling a personal account where the person dies? How do you handle the issue of the estate of that person? These are all very relevant issues which we are looking at.”

Speaking more generally, Drake says there has been an “extraordinary” consensus around the need to reform public and private pensions.

Drake served on Lord Turner’s Pensions Commission between 2002 and 2006 which was charged with overhauling the UK’s pension system to encourage individuals to save more for retirement.

She says: “Creating a culture in society where saving for retirement becomes the norm has to be one of the aspirations for what we are trying to achieve.”

Pada is designing and building a personal accounts scheme in consultation with the industry and it also acts in an advisory capacity to the Government.

It is negotiating contracts with a shortlist of four potential administrators to run personal accounts. The list comprises Tata Consultancy Services, Danish firm Arbejdsmarkedet Tillaegspension, a team including Great West Retirement Services and Canada Life Group UK and a consortium of Logica UK, International Financial Data Services and DST Systems.

Aspects of the current pension reforms have come in for much criticism from the pension industry and Drake and her team have a difficult task ahead. But she is confident it can be achieved and emphasises that the criticisms must not get in the way of the fundamental issue - that millions of people will be better off saving something rather than nothing.

She admits that there is a “communications challenge” for the Government and Pada to put across a compelling case for saving for retirement.

“Obviously, one of the constituent parts of that reform programme being successful is you win the hearts and minds of the population as well, that they recognise the need to save for their retirement but also that they have confidence in the mechanisms for saving for retirement.”

Drake feels that as early as two or three years after the reforms are introduced in 2012, we will see a major shift in the number of people saving for a pension.

Measure of successA key aspiration of the reforms is for employers to re-engage in pension savings and Drake says there has to be a tripartite system of responsibility between the employer, the employee and the state. One measure of success would be if in 10 years, no one talked about pension saving because it is so commonplace.

Another main determining factor as to how successful the scheme has been will be whether people persist with savings. Drake says: “It is no use just saving for a year. In order to give yourself a reasonable income in retirement, you need to persist with your savings for 25, 30, 40 years. It is a long-term project and therefore you have to design things that not only encourages them to save but it encourages them to persist with their savings as well.”

One area of criticism has been that effectively auto-enrolment is a halfway house between voluntary saving and compulsion because employees can opt out of the scheme if they want to. Drake says the Pensions Commission made it clear that if these reforms did not produce a significantly higher level of saving, it may well be that at some future date, the Government will have to revisit the issue of compulsion.

However, she is confident that there will be a high participation rate if there is a good communication programme and good quality implementation of the reforms.

Pension providers have expressed concern that personal accounts will compete unfairly with existing pension schemes because employers will be attracted by the low charges and may be tempted to switch from existing schemes into personal accounts.

But Drake does not believe this will happen and stresses that one of the key principles that Pada has to operate under is that personal accounts must not undermine existing good pension provision.

There is also a cap of £3,600 on annual contributions so there is a significant section of the market in which personal accounts will not be able to compete.

Pada is aiming for a 0.5 per cent annual management charge or equivalent as the charging structure has not yet been decided upon. Standard Life head of pensions policy John Lawson has been particularly outspoken on this issue, saying that the only reason Pada can afford to operate on such low charges is because it is getting subsidies from the Government and that this gives it an unfair competitive advantage over other schemes.

Drake says: “It was always part of the policy that personal accounts, because they are targeted at low to moderate income people, would come in on lower charges, otherwise you undermine the incentive to save because too much of the pension saving is taken in charges.

“One of the arguments for personal accounts is that you have to have scale to have lower charges, so big occupational schemes can have lower charges and that is why part of our target group will be small to medium enterprises because there will be sections of the market for whom it is not economic to serve to at low cost or to provide to at low cost.”

Drake does not accept that levelling down will occur when personal accounts are introduced. “The evidence is that for those employers providing good defined contribution schemes, contribution rates have gone up on average. So if there was a mood among good employers to reduce it, they do not necessarily need to wait until 2012.”

FSA chairman and Pensions Commission chair Lord Turner recently said he thought the Pensions Commission should have been more radical in its recommendations and there was a strong argument for raising the state pension age to 70 by 2030.

Drake says: “The recommendations of the Pensions Commission as we published them were right and we should move forward on that basis. I am sure over 10, 20, 30 years, policies evolve and we know that some elements are up for review in 2017. So things will evolve but I hold the view that the Pensions Commission report was correct.”

Does she agree with the Government’s view that too much has been made of the means-testing issue? “I do not think that the issues of means-tested benefits is such that it is an argument for not proceeding with these reforms for a variety of reasons. You have to remember that means-tested benefits are supposed to provide protection. They are not meant to be an aspiration. You are not designing a system around means-tested benefits and that is quite important.”

She adds: “As a Pensions Commissioner, I would like to take the opportunity to restate that we recommended both reforms to the state and private pensions system and that included raising the state pension age, improving the accrual rules so that carers in particular had a much greater chance of accruing full entitlement state pension and that the state pension should be indexed to earnings.

“I just would not want to lose that as an important part of the reform programme because the consensus is with all stakeholders, with Parliament, with employers, with the insurance industry, with the pension specialists but it is also with the people of Britain.”

It is a long-term project and you have to design something that not only encourages people to save but also encourages them to persist with their savings as well

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