Before I explain more, let me make it clear that I have nothing against personal accounts. The Government has decided that employees will be auto-enrolled into pension schemes. The private pension market does not want to serve small employers. Given their duty under the law, these employers need something into which they can enrol their employees.
Nor do I care whether the Personal Accounts Delivery Authority spends £50m or £500m on bringing personal accounts to life. Their key priority is to deliver a pension scheme for 2012.
But what I do take issue with is who pays for Pada’s costs. Their annual accounts for 2008/09 reveal that they spent nearly £31m over the year. Only £5.6m is financed with loans. The rest – £25m-plus – comes from “grant-in-aid”, a euphemism for taxpayer’s money.
Apart from building personal accounts, Pada advises the Government on policy development. Pada’s accounts state that costs associated with functions of the Government are not chargeable to members and met through grant-in-aid.
However, it is difficult to believe that £25m was spent advising the government and less than £6m on building the scheme. This would suggest that 113 out of their 138 employees are advising the Government about policy matters rather than making a new pension scheme.
Some might say that it does not matter how Pada’s costs are divided. As a country, we need this scheme.
The problem comes in the way it will compete with private sector schemes – principally group personal pensions. Regardless of the reassurances from politicians and Pada, this scheme will compete for employers outside the unserved target market.
The FSA made this plain in the latest retail distribution review. Paragraph 4.63 effectively says a son-of-RU64 rule will apply to the sale of GPPs in competition with personal accounts. GPPs, without access to state aid, will be compared with personal accounts which have the legal right to tap the taxpayer for subsidy.
In the new world of RDR, independent advisers are required to recommend from the full spectrum of products and schemes available, including personal accounts. If personal accounts costs less than half the GPP, surely it is difficult to argue that the GPP gives added value if 95 per cent of employees end up in the default fund?
This is effectively like setting up a Government supermarket to sell subsidised food at low prices to those who could not normally afford it. As well as attracting their target market, there is nothing to stop weal-thier customers shopping there too. Sooner or later, everyone will go to the Government shop rather than Tesco, Asda or Sainsbury’s.
And that is why we should all be concerned about the minutiae of Pada’s costs.
John Lawson is head of pensions policy at Standard Life