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Account cap could shrink

Hints that Department for Work and Pensions could be prepared to take account of industry analysis.

The Government has indicated that it may budge on controversial proposals to increase the annual contribution cap for NPSS personal accounts to £5,000.

The proposed increase from the £3,000 limit put forward by Lord Turner has set alarm bells ringing in the industry, with many commentators fearing that personal accounts will compete with the industry for higher-earners.

Speaking at a National Association of Pension Funds seminar on personal accounts, pensions minister James Purnell said that the Government is willing to listen to arguments from the industry as to why the cap is too high.

But he outlined results of DWP stochastic modelling of investment returns which showed, with an annual limit of £3,000, a median-earner would only be able to reach the benchmark 67 per cent replacement rate approxi-mately 75 per cent of the time.

The DWP believes a median-earner will be more certain of achieving the 67 per cent benchmark, would have to contribute up to £5,000 annually.

Axa head of pensions and savings policy Steve Folkard says the rationale for raising the annual cap is deeply flawed and says the DWP should reveal the stochastic model that it used to come to this conclusion.

He says the risks of allowing such high contributions to be made in a non-advised environment are far too high and more needs to be done to outline how consumers should be protected.

Folkard says information and guidance must be provided to customers, with more detailed guidance for people who save more.

He also claims it is ludicrous to suggest that people on low to medium incomes will save £3,000 or more in a non-advised environment when Government figures show that, even in an advised environment, an employee on £20,000 a year will contribute annually an average of £1,830.

In its written submission to the work and pensions select committee, Legal & General calls for the cap to be cut to £3,000 and warns that a cap of £5,000 would mean subsidised personal accounts would compete head-on with existing provision. The firm says the Government has failed to conduct any analysis in the Pensions White Paper of the effect of the £5,000 cap on employer-sponsored provision.

L&G’s research suggests that if the cap had been set at £5,000, personal accounts would have competed for 93 per cent of the schemes tendered in 2006 compared with just 64 per cent if the cap was lowered to £3,000.

It also claims that 79 per cent of individuals in small to medium-sized enterprise schemes tendered in 2006 would have fitted within the £5,000 contribution cap compared with 60 per cent if the cap was £3,000.

L&G pensions strategy director Adrian Boulding says: “Our analysis suggests that by raising the contribution cap to £5,000, the Government has seriously undermined its stated intention of targeting personal accounts to be an addition rather than a competitor to the existing marketplace.”

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