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Conflicting accounts

NPSS Divisions are growing within the industry over how best to run the proposed personal accounts, says Annie Shaw

Afault line is growing within financial services over the Association of British Insurers’ approach to the proposed national pension savings scheme.

The consultation process on the design of the scheme, due to be introduced in 2012, closed last month. A response from the Government, providing more details, is expected as early as next month.

Options for operating the scheme that have emerged from the consultation fall into two basic categories.

The first, which is supported by the Investment Management Association, favours the independent body model which was put forward by the Pensions Commission chaired by Lord Turner.

This body would be run centrally by the Government, with day-to-day operations farmed out to private-sector administrators and investment managers who could charge no more than 30 basis points to members.

The second is the provider-based model of partnership pensions supported by the insurance industry.

This is a hybrid scheme of personal accounts, run by insurance companies but governed by its own regulator, which would supervise the scheme and keep terms under review.

The partnership scheme was proposed by those, including the ABI, which feels that Turner’s original proposal for an independent institution, with centralised admin, collection and investment of funds, vastly underestimated the cost of setting it up and running it and claimed that the industry, with its existing infrastructure, could do better.

Their concerns included the history of other public sector schemes, such as the Child Support Agency and tax credit system, where IT glitches and other teething problems brought the organisations into disrepute.

ABI director-general, Stephen Haddrill has weighed in with a demand that the proposed delivery committee, a body to be set up to get the NPSS idea off the ground in advance of the creation of a permanent regulatory body, should set up personal accounts without taxpayer subsidy.

But critics inside and outside the insurance industry are unclear about how insurers would make money from taking part in the scheme and are sceptical about the ABI’s reasons for wanting to be involved.

The debacle over stakeholder has left many insurers with hefty bills for setting up and promoting schemes, with little prospect of immediate rewards on any meaningful scale.

Both sides have compelling statistics which they use to back their case.

The ABI says auto-enrolment and employer contributions are the key to NPSS success. Figures from Deloitte suggest the potential market is 10 million individuals with 100bn of assets, much of which will be new money.

However, sceptics say people on low incomes will continue to save little and might be better advised to use their funds for something other than retirement saving.

Figures from the Office for National Statistics show that the target market, while large in number, has limited financial resources. When the value of homes is taken out of the equation, the wealthiest 1 per cent of the population own 34 per cent of the country’s wealth and the same set of figures also show that the wealthiest 50 per cent own 99 per cent of the country’s wealth. This means that the poorest 50 per cent – the sector targeted by the new scheme – will own just 1 per cent of the country’s wealth.

In other words, for a huge tranche of people, any sort of pension saving is likely to be an unimaginable luxury.

Hargreaves Lansdown head of pension research Tom McPhail says the ABI’s enthusiasm for the NPSS smacks of “Torschlusspanik” – the phenomenon of rushing towards a closing door before it slams shut, even though you cannot be sure what is on the other side.

He says: “Looking at the ONS figures, there is no rationale for the insurers to want to be part of this.”

ABI spokesman Jonathan French says the features of auto-enrolment and employer contributions make the economics totally different from stakeholder, even on a working assumption that 30 per cent of those eligible to join will drop out.

McPhail says: “There will be compulsory enrolment but people will be allowed to opt out each year. When someone wants to go on holiday or buy the children a Christmas present, what is going to be the first thing they stop spending money on? Since people who have opted out will then be automatically re-enrolled each year, there will be constant opting in and out. The administration costs are potentially huge.

“The industry could not make a profit at 1.5 per cent on stakeholder, which was relatively simple. The distribution model may be sorted with personal accounts but persistency is not. To have insurers investing in something that could take them 20 years to recoup their costs is not a smart use of capital.”

Life industry consultant Ned Cazalet says: “People on low incomes should be concentrating on paying their debts while 27-year-olds with children have no savings or cannot afford to save because they are spending everything on their children.”

Scottish Life head of pensions strategy Steve Bee says: “The Pensions Commission claims that auto-enrolment into the NPSS is safe because of the compulsory employer contributions. This is not true. The Pensions Commission assertion that its proposals are safe appears to be based on the fact that the compulsory 3 per cent employer contribution will broadly cover the loss of means-tested benefits. In other words, many individuals would get no benefit from their employer’s contributions.”

Speaking at the Chartered Insurance Institute annual conference in Glasgow recently, the ABI’s Haddrill reiterated insurance industry support for personal accounts but emphasised that the delivery authority must have an overriding duty to ensure “existing pension schemes and other private saving can continue to flourish”.

National Association of Pension Funds chief executive designate Joanne Segars says: “If personal accounts are not carefully aimed at those who cannot currently save in a pension through their job, there is a risk that employers with good pensions and higher contributions, who will face higher costs following the reforms, will switch to personal accounts where less will be saved.

“If good workplace schemes close, then the millions of people who save in them will be worse off.”


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