By Christmas we will hopefully know a lot more about personal accounts. We will know whether there will be a charge cap and a contribution limit although we may not yet know exactly what levels they will be set at. Importantly, we will also know how personal accounts will be delivered to the market.
The White Paper, published in May, suggested two types of delivery model – the National Pensions Saving Scheme, outlined by Turner in the Pension Commission’s report, and the branded provider model where people choose their personal account administrator.
Over the months, a number of variations have emerged from these original concepts and it now appears that the Department for Work and Pensions is likely to plump for one of these rather than either of the original models.
In the Government’s summary of responses to the White Paper consultation, published at the end of October, it outlined six delivery models. As well as the original branded provider model, it refers to three variants. The Association of British Insurers’ model is similar to the branded provider model but does not have any limit on the number of providers which can offer personal accounts and employers can choose a default provider for employees who do not choose an administrator.
The second variant is the Aegon model, where each provider offers only a single investment fund. The reasoning behind our response was that people do not want to make any investment choice and we estimate that at least 90 per cent will fall into default fund. So why offer more choice? People can still choose their provider based on the fund they offer and those interested in making wider investment decisions will be better served by the existing market.
The final model is the Fidelity model or open personal accounts model. This is really a hybrid between the two original models. Everyone would initially go into the NPSS unless they decided to opt for one of a select number of branded providers. The branded provider could offer something slightly different from the NPSS, for example, ethical investment. This may cost more but no charge cap would apply to these branded provider options. This sounds like extra complication to me. Surely the current pension market would serve this purpose just as well by offering alternatives to the NPSS?
As well as the standard NPSS model, the Government also introduces the Norwich Union model, where instead of a single entity for investment and administration, the personal account administration is handled by branded providers. What is unclear is whether people have any choice over their branded administrator or whether they will be simply allocated an administrator based on criteria such as surname or geographical location. Lack of provider choice seems to sit uncomfortably with decisions we are used to making in modern life, where we choose all our suppliers from food to energy.
From this array, the Government will choose its preferred delivery model.
One thing all delivery models, apart from the pure NPSS with a true single administrator, will have in common is a clearing house. Contributions received from employers will have to be distributed to people’s administrators. However, the clearing house does not follow the same design for each model and there is a chance it maybe more complicated, depending on the administrators involved. This has to be taken into account when choosing the delivery model, as more complexity may translate into higher costs.
Although we are still five-and-a-half years away from the go-live date of 2012, important decisions about the design and implementation of personal accounts are being taken now. One thing is for sure, the choices the Government now makes about delivery models will have far-reaching consequences for determining which providers decide to participate in this market and therefore its long-term success.
Rachel Vahey is head of industry development at Aegon Scottish Equitable