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Personal effects

Among the many misconceptions that the overwhelming majority of members of the public – and not a few IFAs – have about journalists is the one that we spend most of the time writing articles.

Nothing could be further from the truth. In fact, as every experienced journalist well knows, aside from the vitally necessary hours we are required to spend down the pub quizzing our contacts about stories, much of our time is spent reading, not writing.

Take last week, for instance. During the day, I was indeed writing for my “outlets”. But, aside from that (and the obligatory pub visit or two), I spent several evenings in front of my computer reading as many responses as I could to the Government’s most recent Pensions White Paper, Security in Retirement.

Because too much time looking at a screen makes me go cross-eyed, I ended up using hundreds of sheets of paper to print off all the submissions from various interested parties, forcing myself to read them late at night, over breakfast and even in the bath.

The bottom line, distilled from the tens of thousands of words published on the subject, appears to be this: personal accounts, the new term for the National Pensions Savings Scheme, are by no stretch of the imagination the panacea the Government would like us to believe they will be.

For many categories of workers, especially those who may be automatically enrolled into personal accounts late in their careers, they offer a surprisingly small pension and may even be harmful to them financially.

In other cases, those on low wages may find that they are making heavy financial sacrifices in order to save into personal accounts, sacrifices that are not justified by the level of pension they receive.

Even the FSA has weighed in, warning that minimum contribution levels set out in the White Paper may not provide the level of income in retirement that will meet some savers’ expectations. For many, a personal account may be an inappropriate choice entirely, for example, those with high-interest debt or the terminally ill.

Of course, the FSA goes on to add that suitable generic advice may help some of these individuals to make the right choices and the ABI’s suggestion that a default account be made available, with lifestyle options that are easily understood, would go a long way to solving this problem.

Even so, it is worth pointing out that a major concern for the regulator is the danger that a branded provider model may lead to unsuitable transfers into personal accounts, alongside “inappropriate marketing and sales practices”. It warns that providers may rely on cross-selling to make money from a system which has very low charges.

What is becoming clear from the responses to the White Paper is that the Government has some major questions to answer. A successful transition to personal accounts is not simply a question of deciding which model should be followed – the branded provider one favoured by the ABI or the NPSS one originally put forward by the Turner Commission.

It will require massive spen- ding by the Government, as well as a rejigging of the pension credits regime to ensure different categories of workers do not lose out in the interim, as saving into personal accounts builds up over the next two or three decades.

It will also require a far more realistic assumption of the costs involved in creating the mechanisms and technology necessary to collect and distribute the flow of savings that are then invested on behalf of accountholders. At present, there is little evidence that the Government understands the massive responsibilities it has if it is to make personal accounts a success.

But there are questions that the financial services industry must answer, too. It has made some interesting responses to the White Paper but it also remains the case that the issue of cost remains critical in the Government’s eyes.

It is not enough for the ABI to quote, as it does, the Pensions Policy Institute’s report on the importance of charges in order to “prove” that the difference between 0.3 per cent and 0.6 per cent AMCs would only be 2 for a woman on median income making contributions for 23 years.

Paymaster, the pension administration and payroll service privatised by the government in 1997, collects contributions from 11,000 employers on behalf of more than over 1.3 million NHS pensions scheme members. It estimates the difference in pension payouts between the two AMCs would be 9 per cent, based on 40 years’ contributions.

The fact is that none of us can be certain as to the timeframe of contributions for most personal account savers in the coming decades, how much will be paid in, or what investment returns might be. It is ironic that the PPI’s own research shows the impact of cuts in pensions credit as a result of higher savings would be 2 a week in real terms, exactly the same as the difference between AMCs of 0.3 and 0.6 per cent.

In other words, both the Government and industry have responsibilities that they must meet if personal accounts are to succeed. This is too important an opportunity to miss for either side.

nic@inspiredmoney.co.uk

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