Paul Myners has a few interesting years ahead of him. In his new role of chair of the Personal Accounts Delivery Authority, he has the responsibility for turning personal accounts from a policy idea into a thriving and successful scheme.
It is very important for the pension industry that Myners succeeds. We need pension reform to meet its objective of getting more people to save more money. The target market for personal accounts is people without access to an employer’s scheme and those who will not be heavily means-tested in retirement.
The industry cannot afford for personal accounts to fail. This scheme will become the most significant part of the pension landscape and if the number of people joining is low, communications are cumbersome or contribution collection is clumsy, personal accounts will not be the only part of the industry to be affected. Poor media and public response to personal accounts will shape the whole industry. Personal accounts therefore have to succeed for our long-term benefit and we should play an active part in making sure they do.
Myners faces two immediate challenges. First, he has to recruit the best team possible to help him achieve his goals. The delivery authority should be stocked with the right people for the job – those who understand the issues and have practical experience of working in the financial services industry, rather than those who are concerned only with policy.
Second, he has to get his sums right. Personal accounts have some tricky financial waters to navigate and Myners has to make sure the financial management of the scheme adds up.
The consequences of failing to deliver sound financial management are big. If the personal accounts scheme is mismanaged, it will come under major financial strain. To set up the scheme in the first place takes money. As the taxpayer will not be subsidising the scheme, the required funds will have to come from borrowing, which must be repaid over a specific period. Not having the right money at the right time to repay these loans will bring additional financial pressures, which may even lead to unplanned further borrowing.
If money is tight at the time of repayment, finding the funds to repay these loans could possibly mean diverting it from other sources and the possibility that the scheme could have insufficient income to cover ongoing operating costs.
If the personal accounts scheme ever finds itself in such a position, there are only a few ways out. One is to ask the Exchequer for subsidies. Despite the assurances that this will be a stand-alone scheme, I doubt that the Government could stand back and watch personal accounts struggle.
The second route is to do what most organisations do at moments of financial strife and that is to raise charges. This would be a difficult action for political reasons but it is a risk and the personal accounts board should make it clear to potential members that charges could rise in the future, as well as fall.
The financial risks faced by the scheme can only be minimised by setting the level and shape of charges to match, as closely as possible, the initial and ongoing costs of the scheme. A flat single management charge may not be the natural starting point, as it creates the most significant financial management challenges.
Instead, the level of charges should be set based on a rigorous assessment of all direct and indirect costs, including likely commercial contract terms. In addition, it should include a margin for prudence, similar to that required by the FSA for other institutions bearing long-term financial risks.
The personal accounts scheme may be an occupational scheme but could learn a lot from contract-based schemes offered by life offices. It is a commercial entity, not a charity, and has to be independent from the taxpayer and stand on its own financial feet – another reason for making sure the right people are in charge.
Rachel Vahey is head of pensions development at Aegon Scottish Equitable