It makes sense the Personal Accounts Delivery Authority adopts the same spirit, and designs personal accounts to focus on the needs and wants of its target market.
Pada might have takena step in this direction in its 50-page discussion paperon charging structures, by including members’ perceptions of charges as one of its key selection criteria. It has also backed this up by carrying out some qualitative research with prospective members about their views.
This is all good, sensible stuff. The ideal charging structure for personal accounts is one where the timing and the amount of the charges received match the costs paid out. But in the real world this would meana joining fee for members and nothing would prompt people more to opt out thana high up-front joiningfee of, say, £50.
Generally, the qualitative research showed that charges were an accepted part of everyday life, but that they had recently been brought into disrepute because they were impossible to understand or bore little relation to the perceived actual costs of business.
The research also questioned people’s views on the various charging structures – the two main ones being an annual management charge or an annual management charge plus a contribution charge. However, the combination charge got a kick-back from those questioned for being too difficult to understand.
This puzzles me. As part of my quest to keep to at least one New Year’s resolution, I recently joined a gym. As well as a monthly fee, I have had to pay a membership fee to cover the paperwork and the cost of my membership card. This got me thinking about other charges I pay. There is so much in life that has complicated dual charging structures, for example mobile phones, utilities, bank accounts and Isas.
Consumers accept dual charging in many areas, so if personal account charges are transparent and properly explained, this should not be a barrier to saving.
I am tempted to point out that if someone is asked directly whether a dual charging structure would put them off buying a product they may answer yes. But in practice they accept it. There are other stronger reasons why people will opt-out – affordability being one.
Members’ views are not the only criteria Pada is considering. It is also looking at retirement outcomes for members, and trying to make sure outcomes between generations are fair. For example, the simplest approach may be to levy high charges initially until the scheme is established and then lower charges. But that is hardly being fair to those people who join in the first flushes of pensions reform.
Pada also has to judge charges against the sustainability of the scheme. When doing this we have to remember that personal accounts are no normal occupational pension scheme. In other schemes if the key assumptions – on how many people will join, how much they will pay in, and how long they will remain members – don’t match actual experience, then there is always the employer standing behind the scheme to make up any financial difference. Personal accounts don’t have that luxury. Instead, the taxpayer will have to make up the gap, or the scheme will collapse.
Pada has not yet published its financial modelling, saying that the detail is of commercial sensitivity. But it is perplexing why it believes it has to. It is important that Pada is transparent about these assumptions, otherwise, we will struggle to have a sensible debate on both the structure and the level of charges.
Obviously, Pada should try as much as it can to make sure the charges for personal accounts are reasonable, represent value for money and are transparent. And the key criteria it has picked out are right. But Pada needs to keeps things in perspective. In an ideal world, people may not prefer to pay dual charges. But in the real world they do so in many walks of life, and a dual charging structure may be the key to helping personal accounts succeed without falling back on the taxpayer.
Rachel Vahey is head of pensions development for Aegon Scottish Equitable