When the Pensions Bill receives Royal Assent, the Personal Accounts Delivery Authority will have the executive powers it needs to implement the personal accounts scheme. But what must be done to ensure the scheme achieves its goal of encouraging more people to save for their retirement?
When the scheme is up and running, Pada will step back and the ongoing management of personal accounts will be in the hands of a trustee corporation. Until then, it will have to operate within strict principles set out in the Bill, which are designed to enshrine the key elements arising from consultation with politicians, employers, consumers and the pensions industry.
These principles are:
Like the trustees of any other occupational scheme, the members of the trustee corporation will hold the interests of its members as paramount and will not normally have regard for other schemes.
However, some practical constraints must be placed on the trustee corporation to ensure it can maintain the spirit of consensus in which pension reform has been developed. It is essential that these constraints are framed in a way that allows their removal or relaxation only following full consultation, which should be led by the Department for Work and Pensions.
But what constraints will work best?
The contribution cap of £5,000 a year after the first year will mean that high earners may not be able to receive the level of contribution they currently enjoy in their private workplace scheme. And the ban on transfers into personal accounts will leave employers having to manage two schemes if they choose to make future contributions to personal accounts. Both these constraints will act to discourage employers from abandoning private workplace schemes.
There has been much debate about what the level of charges should be. We believe all members of personal accounts should be subject to the same charging level. It shouldn’t matter whether you join the national scheme from a large employer, a small employer, as self-employed or as any combination of these – the charges paid should be the same.
If the behaviour of some employers results in unreasonable addit- ional costs, those emp- loyers should pay an additional charge.
What a single charging level for all would do, however, is prevent personal accounts being marketed with different propositions geared to different market segments. And it would also ensure that the administration of the scheme is kept as simple as possible.
Personal accounts also need to focus on their target market of people who do not have access to low-cost, work-related schemes. Logically, therefore, they should only be open to employees for whom it is their qualifying scheme or to self-employed people.
That might seem unduly restrictive. Since personal accounts will have to develop provisions for self-employed people to make contributions, they could simply allow these to be used by anyone. But different groups of people will need different messages.
Employees in a private workplace scheme would need to consider why they thought personal accounts were preferable to their employer’s AVC scheme.
Self-employed people would need special attention, particularly because they do not have any matching employer contribution. And unemployed people would clearly need additional guidance. But since personal accounts is an occupational scheme there should be no expectation of universal access for people – just a requirement for access for employers.
So constraints on membership are, on balance, sensible to keep personal accounts focused. And they are also consistent with minimising adverse effects on private schemes, and their additional contribution facilities.
The principle that the cost of personal accounts should be minimised is also important. Low cost has consistently been a key plank of the scheme since it was proposed by the Pensions Commission.
All the evidence suggests that auto-enrolment optimises take up, but with the vast majority paying the default contribution rate of eight per cent of banded earnings this will be inadequate. A key element of worksite marketing must therefore be to encourage members to engage and plan what contribution they really should be making to deliver the level of income they want in retirement. Not to provide that support would be the wrong choice for members, even though it would involve additional cost.
It may even be the case that all auto-enrolment schemes (at least) should have a new obligation placed on them to provide good information on desirable contribution levels.
Although the Pensions Bill contains some key decisions on pension reform, Royal Assent is not the end of the process. There is a great deal of vital detail capable of shaping the future market yet to emerge.