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Reality check

Fewer members, a different name and a postponed delivery date are all on the agenda for personal accounts, according to Personal Accounts Delivery Authority chief executive Tim Jones. But IFAs hoping for more certainty on what they are competing with will be disappointed. Jones has made it clear that much is still to be determined before the state-sponsored super-scheme takes off.

In a radio interview given over the festive period, Jones spelled out his views on what he believes needs to be done to make the NPSS project fly.

He admits that there is a distinct possibility that the 2012 start date will not be met, arguing that it is more important that it starts well than on time. He also says the name personal accounts could go and that employees’ contri- butions will be phased in as well as those of employers.

Add to that his prediction of five million members joining the scheme rather than the six-eight million envisaged by the Pensions Commission and it is clear that Jones is keen that the public and his paymasters’ expectations are managed to something more realistic.

The proposal to deduct employees’ contributions in a gradual fashion rather than immediately deducting qualifying earnings makes sense from a behavioural finance point of view and will cut the numbers of those opting out considerably.

The Government has already said that employers’ contributions will be phased in over three years.

Jones is now planning to deduct just 1 per cent of employee earnings in year one, 2 per cent in year two and 4 per cent in year three. If it is brought in to coincide with an annual pay increase, employees need not see any numerical reduction in pay at all, whereas a 4 per cent chunk out of qualifying earnings would definitely send many low earners straight to the HR department with a request to opt out.

Critics of the way personal accounts can be a poor deal for some likely to be on state benefits will see this as a most cynical use of apathy and inertia to further the agenda of getting the lowest income group to pay from their salary for something they would have got anyway but for Jones it clearly makes business sense.

One downside of this, however, is the simplicity of the initial message – that the employee pays in 4 per cent, the employer 3 per cent and the Government 1 per cent – will be lost. Presumably, the Government will only be paying in 0.25 per cent of salary in those early years.

As for the personal accounts moniker, it is bland, explains nothing about what it is and certainly gives no suggestion that the money in it is tied up in a pension. Maybe that was the idea – to hope people would not notice the restrictions of pension savings. But if the Government wants employees to engage with the retirement savings they have been auto-enrolled into, the cornerstone of that engagement has to be a name that people will understand.

Jones’ prediction of a lower figure for scheme membership of five million is understandable. Any figure above five million can then be seen as a success. But that, taken together with some of Jones’ other proposals, most notably the graduated contributions of employee contributions in the early years, will make the num-bers for what is meant to be a bargain basement pension solution, which are already pretty tight, even harder to manage.

This is going to be particularly acute in the earlier years and is something that life insurers will be scrutinising with interest.

A model with five million members contributing a full 8 per cent of earnings from 2015 will take longer to break even on its target annual management charge, whatever that may be, than one of six to eight million members, with full employee contributions from 2012. Jones clearly thinks that is a price worth paying for stemming the flow of opt-outs in the early years.

Where all this leaves IFAs is unclear. Jones’ talk of delay should make it easier to dissuade employers from holding back on implementing new schemes in anticipation of the state version. Add to that the number of other unknowns and the financial planning landscape is hazy to say the least. But at least Jones has been forthcoming on what he is planning. Advisers will hope he carries on that way.

John Greenwood is editor of Corporate Adviser

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