The mechanics of auto-enrolment are currently being finalised and hopefully the DWP will take a sensible, pragmatic and, above all, flexible approach to help employers put it into practice.
The consultation on the design of the default investment strategy for personal accounts and the range of funds it will offer scheme members is also still ongoing.
Meanwhile, the Personal Accounts Delivery Authority consulted on charges last year and a decision is expected either later this year or early 2010. The emphasis so far has been on setting scheme charges at a fair level for members. This is important as personal accounts cannot be allowed to fail.
If things do not go according to plan and real experience of uptake and opt-out rates do not match initial assumptions, either charges will have to rise or the taxpayer will be forced to step in to subsidise it.
Minimising these risks will mean getting both the level of charges and the shape of the charging structure right. It is widely accepted that the mismatch between costs incurred and charges recouped varies dramatically between charging structures, the most extreme mismatch coming from a flat annual management charge structure.
When Pada consulted on this last year, it found responses were polarised between a single and dual- charging structure. A dual structure is more likely to ensure the long-term sustainability of the personal accounts’ scheme but some have suggested that people may be put off by this type of charging structure and will opt out. Is this concern valid?
Aegon conducted consumer research to test this theory. We showed two groups of people generic information about personal accounts and asked them how likely it was they would remain in the scheme.
The information given to both groups was identical apart from the charging structure. One group faced a deduction of 0.5 per cent of the value of their pension fund each year while the other was told that charges would be a 5 per cent deduction from contributions plus a 0.3 per cent deduction from the fund each year.
The results showed a dual-charging structure was no more likely to influence decisions than a single charge. In fact, charging structures were only the seventh most popular reason for opting out. The top reason, by a large margin, was people preferring to make their own arrangements for retirement saving.
This can only be good news,as it gives Pada the green light to focus on making the personal accounts’ scheme sustainable in the long term. People need to know that their money is safe and taxpayers need to be protected from the risk of unnecessary subsidies.
Personal accounts are a risky proposition, especially as currently formulated. Setting up something like this on the scale envisaged is totally untried, and ultimately the taxpayer will stand behind the project.
We need to get the key decisions right but we should also take a step back and take a fresh look at whether the pension reform agenda as a whole is on the right track.
Rachel Vahey is head of pensions development at Aegon