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Five challenges for personal accounts

ABI director general Stephen Haddrill poses a series of tests for the Government’s pension reforms if they are to meet the twin aims of improving public confidence and encouraging greater levels of retirement saving

Last week’s Saver Summit, held in London, came at precisely the right time in the pension calendar, just after the Queen’s Speech in which a Pensions Bill was announced and before publication of the latest White Paper.

Keynote speeches by Work and Pensions Secretary John Hutton and Treasury Economic Secretary Ed Balls were thoughtful and engaging, giving delegates a useful insight into the Government’s latest thinking on pensions and savings.

The Association of British Insurers also published our 2006 State of the Nation’s Savings report which shows that over 12 million people are still not saving enough or nothing at all for their retirement.

The ABI survey also revealed that, for the first time, more people are in work-based defined-contribution schemes than private-sector defined-benefit schemes.

Interestingly, the decline in private-sector DB schemes contrasts with growth in public-sector DB pensions. At the same time as the Government has taken decisions which have accelerated the decline of DB schemes, it has retained DB for its own workforce.

Looking at the future of pensions, the survey highlights that knowledge and understanding among consumers of what that new world might look like is low. Sixty-six per cent of people said they do not know about the Government’s planned state pension reforms. Fewer than 25 per cent trust the Government to deliver its promises on state or private pensions and only 30 per cent feel that Government plans to introduce personal accounts will be enacted.

Meanwhile, a remarkable 70 per cent of people said that property represents the best long-term investment, with just 10 per cent opting for equities.

All this shows there is still much to be done both by the Government and the savings industry to improve public trust in and knowledge of long-term savings.

The ABI’s second publication, Five tests for pension reform – what the Government must do to get Britain saving again, sets out the challenges which must be met if we are to achieve the goal we share with the Government of getting more people saving more (centre).

The survey results, which show consumers’ relative lack of trust in the Government to deliver on pensions, mean that an infrastructure based on the model of existing pension provision will better meet consumer expectations, be easier to implement, encourage more confidence and be more successful than a brand new centrally-administered system.

Personal accounts will produce more savings if they are effectively targeted at those people they are intended to help. We do not want to see them being taken over, as stakeholder was, by the better off for whom they are not intended.

Transfers into and out of personal accounts should not be allowed, as the new system should provide a new rung on the savings ladder for those who need it rather than replace the existing steps.

There should also be a cap on contributions to personal accounts, as recommended by the Pensions Commission. Means-testing must also be reduced substantially if the huge negative incentive that exists now to save privately for retirement is to be removed.

Competition can have great benefits in the personal accounts environment. Research carried out for the ABI by Oxera shows that there is negligible difference in terms of cost between the two alternative models set out in the White Paper.

It is the consumer who must be king in this model, not the Government or, indeed, pension providers. Firms will thrive when consumers choose to save with them, so providing an incentive for excellence in customer service and administration.

The delivery authority will deliver if it is designed with a specific and focused set of objectives. These should be laying the foundations for automatic enrolment with a mandatory employer contribution, ensuring that collection arrangements are put in place through a private sector-run clearing house, ensuring that the existing pension market is able to grow and prosper, promoting saving generally above the mandatory level and achieving value for money in personal accounts.

Working now to re-establish the savings culture in Britain will help to avert planning blight. The ABI, for its part, has initiated the Save More Now campaign and the Government can augment this by taking key decisions as soon as possible, communicating a clear message to the public and ensuring that the regulatory environment encourages saving now, as well as in the future.

For IFAs, the new world of personal accounts presents challenges and opportunities. The Government wants personal accounts to be so low cost that there is no need for advice. This is a concern, given what our survey has found on the level of understanding about pensions. The Government must ensure that good information is there for people.

However, personal accounts will get people started on saving and many will eventually turn to the private pension market to supplement their saving. Indeed, they will need to if they are to secure a reasonable level of income in retirement.

IFAs will have an opportunity at that point in ensuring that millions of people get pensions and savings products that are appropriate.

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