Personal accounts will not start until 2012 but they are already having an impact on today’s pensions. This will increase over the next few years and will be felt whether or not product providers want to bid for a piece of the market.
A good example of this is the FSA’s announcement of the continuation of the RU64 rule issued in March 1999 by the PIA. This requires that firms recommending personal pensions have to explain in the suitability letter why they consider a personal pension to be at least as suitable for the client as a stakeholder pension.
In June 2005, the FSA published a consultation document on the possible removal of RU64 and in May 2006 it said it would delay its decision until there was greater clarity about personal accounts.
Following responses from various groups, including consumers, the FSA has decided to retain the rule, as set out in its February publication, Suitability Standards for Advice on Personal Pensions.
It states that future buyers of personal and stakeholder pensions will require the extra protection of RU64. Advisers will need to take account of “wider environmental issues such as the future introduction of lowcost personal accounts”.
Personal accounts will be seen positively by fund managers which want to bid for investment management contracts and by specialist scheme administrators which will see opportunities in designing and running new pension admin systems. Even for these groups, however, the Government’s decision to base individual accounts on a completely new admin structure will increase complexity and uncertainty.
There will be a negative impact on providers which offer bundled corporate defined-contribution pensions. They are likely to find that employers will switch to personal accounts to reduce the governance burdens of occupational schemes and take advantage of lower expectations of employer contribution.
On the other hand, employees who have never had the chance to join an employer’s scheme will benefit from employer’s pension contributions for the first time.
Traditional pension providers may not look forward to the introduction of personal accounts but there are opportunities. The Government has been clear that, in future, people will have to retire later. With defined-benefit schemes declining in popularity and lower employer contributions being paid to DC schemes, early retirement will have to be funded increasingly by personal savings.
Personal accounts will not solve the savings trap created by means-testing but the requirement for employer contributions will lessen the problem.
Published information and discussion has centred on the savings stage of personal accounts and little has been said about the payment of pensions to personal account holders.
There does not so far seem to be much space for insurers in the personal account world but the conversion of accumulated savings into pensions will require the expertise of the traditional annuity providers.
Existing providers of DC pensions including group personal pensions, and employers who sponsor those schemes, are likely to want to retain them and seek exemptions from offering personal accounts but whether they are successful will depend on how politics develop in the next few years.
A number of factors could affect the eventual outcome – a change of Prime Minister in 2007, a potential change of Government in 2009-10, the impact of EU legislation, particularly on auto-enrolment and group personal pensions, and the ability of the Government to follow through with the admin aspects of the project.
The outcome could also be affected by two consultation papers issued by the Department for Work and Pensions, the Thornton review of organisations involved in regulating pensions including The Pensions Regulator, the Pension Protection Fund and the FSA, and the deregulatory review of private pension regulation which aims to cut red tape for employers who offer pension schemes.
Tony Reardon is principal of Reardon Consulting.