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The big question adviserzone

the questionthe answersSimon Fraser, president of investment solutions group at Fidelity InternationalOur research shows that the introduction of personal accounts in 2012  will see at least 300,000 UK employees deprived of  their existing pension scheme benefits, Just under 7 per cent of finance directors we polled said they will close existing schemes and replace them with personal accounts. The Government’s original intention for personal accounts was to ‘complement rather than compete’ with existing provision, but our findings reveal that this will not be the case.  There is clearly some confusion for companies not knowing what to do next. We recognise that everyone is striving for the same goal but action needs to be taken now to mitigate the risk of the pension crisis deepening”.

The research shows that in addition to the 300,000 people at risk, an additional 11 per cent of employers say that they will keep all existing employees in the company scheme, but new joiners will only be offered personal accounts – with considerably lower contribution rates. 

For the thousands of new entrants to the UK workforce each year, and even for those changing jobs, there may be no opportunity to join a defined benefit or defined contribution scheme so our estimated 300,000 figure is just the tip of the iceberg.

Duncan Howorth, managing director of JLT Benefit SolutionsI am not that surprised by the figures quoted by Fidelity, as there will be schemes that move over to personal accounts. But we perceive the advent of personal accounts as a consulting opportunity. Employers will need to embrace personal accounts and make sure their employee benefit programmes fit with the new rules. We expect employers to want to review what they have got – it is a good opportunity for us to take clients back to basics.

The big risk will be employers closing defined contribution schemes deciding to close other benefits packages at the same time. Pensions are the core of most firms’ benefits, so if the pension is outsourced to personal accounts, there is a risk of losing the life insurance and healthcare benefits as well.

The impact on life insurers will be more negative, however. If employers migrate to personal accounts, even with the low value, low contribution business that advisers tend not to be interested in, insurers will see lapse rates rising on their accounts, as several have already been seeing. This will hit their embedded value which is negative for their profits.

Chris Bellers, technical manager, pensions at Friends ProvidentBasically the risk of employers leveling down is higher if the alternatives to personal accounts cost them more or if they have to do more work. For this reason the way the government implements the policy will have a huge effect on how much dumbing down there is.

There are several issues that need addressing. Firstly qualification limits, where employers will have to calculate pension contributions for bonuses. It is OK for the DWP to say that they are not going to police this area hard, but if they are presented with complexity employers will drop private schemes.

Auto-enrolment will also cause finance directors to focus on costs – the ABI says the average employer contribution is 6 per cent. If they have to pay that to all staff then they are going to see their costs go up and will look again at personal accounts. However, I don’t necessarily think that means they will bin their company scheme altogether; rather they will put those that don’t sign up into personal accounts. Employers want a good scheme to show to the world how good they are, but they don’t want everyone to join it.

It all comes down to how well the government integrates personal accounts with what is already there.

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