John Greenwood Greenwood’s View
Is the plan B being developed by IBM with a group of life insurers the brainchild of group pension providers worried at the arrival of a low-cost super-provider on their patch?
Powered on by the economies of scale that seven million customers will give it, the company that takes over the delivery of personal accounts will have a launchpad for an entry into the broader pension market.
It is not quite like Tesco opening up in a small market town as the likes of Aviva, Prudential and L&G are hardly boutique operations. But it does seem reasonable to expect that whoever picks up the personal accounts’ contract will be in a position to offer competitive products across other areas of the pensions market.
This is reason enough for providers to want to prevent a bargain basement outfit arriving on the scene. If the personal accounts review fixed for 2017 sees the contribution cap lifted, life offices will have even more to worry about.
But my understanding is that it is not providers that are driving plan B discussions, but IBM. What the plan might look like remains sketchy. Some describe it as an evolution of the proposal put to the DWP by the ABI at the Department’s Pensions Summit in the Cabinet War Rooms back in 2006.
Back then, when personal accounts were known as the national pension saving scheme, you may recall the ABI brought us a proposal called partnership pensions.
Under partnership pensions, providers would offer a standard contract product,but would be able to compete on quality of service and investment performance. Employees would be able to choose another provider from the approved list if they wanted and, if an employer did not choose a provider, they would be allocated one on a rotation system by a central body.
As to how that proposal may have been adapted, nobody is saying in public. Some experts have mentioned revitalising stakeholder but the size of the pots and the problems dealing with micro-employers make the figures hard to add up.
One possible model being talked about centres on taking providers out of the part of the process where they cannot make a profit – namely, the collection of the funds from over a million employers. This would see the creation of a centralised collection agency, possibly funded by a loan from the state in the early years. These funds would then be passed to providers who would do what they are good at – deal with customer queries, manage the investments and pay annuities.
Critics would say this solution cherrypicks the easy bits of running a pension provider while leaving the hard part to the state. Supporters would point out it removes the risk of consumers blaming the state if and when things go wrong with their pension investments.
Supporters of a free market would add that it also limits intervention in the precise area where there is a failure – the cost of collecting contributions from micro-employers.
For the Conservatives, a further bonus of an industry solution would be the ability to hand over a potential launch nightmare to the private sector.
The Tories are clearly uncomfortable about what liabilities they may be taking on if they win next May and will be interested to hear what the plan B group has to say.
The Conservatives may well be attracted by a market-based approach but IBM and Co will have to make sure the figures add up.
John Greenwood is editor of Corporate Adviser