The Association of British Insurers is urging the Government to abandon a charge cap on pension personal accounts, claiming that competition between providers will drive down costs.It says the Government should not specify a charge cap as the costs of running the scheme will be driven by the level of participation. It proposes setting up an economic regulator which will have the powers to impose a charge cap if providers fail to keep costs at a reasonable level. The ABI says the Government should not be fixated on cost and says the belief that a single Government-sponsored provider will be able to secure maximum economies of scale is misplaced. Research carried out by Oxera on behalf of the ABI shows most economies of scale have been exhausted when funds reach a size of £500m and there are no additional cost benefits once funds grow to £1bn. It says the Government should decide on a model for the delivery of personal accounts on grounds other than costs. The ABI says there is a strong focus on providing quality service for employers and employees. Competition between providers will help improve services which will persuade people to maintain their savings in personal accounts. Under the ABI’s plans, employers and employees will be able to choose a provider but there will be a default system whereby savers are automatically allocated to a provider if they are unable to choose. The ABI focuses heavily on protecting existing pension contributions. Key proposals to mitigate against levelling down of schemes include barring transferring in or out of personal accounts in the initial stages and providing a definition of a good pension scheme. There is nothing in the ABI’s proposals to suggest advisers play a significant role in its vision of the NPSS. Director general Stephen Haddrill says: “The costs of the scheme will be determined partly by the level of take-up so it is important the Government does not get hooked on one level of charge. It should not make a promise it is unable to keep.”
ABI’S KEY PROPOSALS FOR PERSONAL ACCOUNTS
- Targeted at those who are currently saving little or nothing.
- Existing pension schemes throughout a contribution cap of £3,000, simple definition of existing good pension scheme, initially no transferring in or out.
- Auto-enrolment and mandatory employer contributions.
- Provision for predictable returns and fair charges, for example, lifestyling in the years running up to retirement.
- Employees can choose provider, with a default fund for those who do not want to specify an alternative fund.
- No charge cap as competition will drive down costs.
- Good quality service through competition between providers.
- Independent quality authority will ensure personal accounts are implemented properly.
- Independent economic regulator (formed out of the delivery authority) will have a range of powers including imposing a charge cap if providers fail to keep down charges.
- The ABI argues that the scheme should promote higher levels of financial capability, provide simple information for savers about their options for turning pension savings into income at retirement and implement a new process for identifying a suitable default annuity option at retirement for each customer.
- People saving money in personal accounts should have recourse to the Financial Services Compensation Scheme.
- The capital adequacy of the scheme would be monitored by the FSA.