Now that the Personal Accounts Delivery Authority has its key personnel in place, it is an opportune moment to ask how successful this latest initiative to encourage mass pension saving is likely to be.

The year 2012 is likely to be busy for Britain. Not only is London hosting the Olympics,
but it is also the year that Personal Accounts will be introduced, providing the country with a national pension scheme.

In December 2006, the government published a white paper outlining its proposals
for Personal Accounts, with the intention of introducing a straightforward opportunity
for employees to contribute to a high-quality, low-cost savings vehicle.

In January this year, then secretary of state for work and pensions Peter Hain argued that ‘The government’s pension reform package is one of the most radical changes in the 100 years since the first state pension was created by the Old Age Pensions Act 1908. And radical change is needed. One hundred years ago few people lived long enough to collect a state pension – on average men only survived to age 49 and women to 53. Today, one in four babies is expected to live to 100.’

The problem of longevity
Increasing longevity is now a fact of life. People are living longer than ever before, and this is a trend that continues to rise. A person aged 50 today has a one in two chance of reaching 90 and a one in ten chance of reaching 100 – eight and 18 years respectively more than the average UK life expectancy (according to figures from Life Insurance Plc).

However, come 2012 this could all change. The Personal Accounts scheme, which is currently being considered by Parliament, will see those aged between 22 and state retirement age who are earning between £5,000 and £33,540 a year automatically enrolled into Personal Accounts, unless they can join a suitable work-based pension scheme.

Employees will be expected to put in a minimum of four per cent of their salary, the employer a minimum of three per cent, and there will be one per cent from the government in tax relief.

This money will then be held in a ‘default fund’ – unless the individual chooses otherwise – providing investors with a portfolio of different assets, including social, environmental and ethical investments, unit trusts and investments that conform to religious beliefs.

As with other pension products, savers using Personal Accounts will be able to take up to 25 per cent of their fund as a tax-free lump sum when they retire and use the remainder to buy an annuity, to provide them with an income throughout the years of their retirement.

The government is also proposing charges as low as 0.3 per cent per annum for the management of Personal Accounts, compared with the 1.5 per cent a year charged for existing stakeholder pensions.

A positive step?
‘As with a lot of things to do with financial products, this government is looking to introduce a price cap to ensure that consumers get good value for money. But the general belief at the moment is that it is going to be impossible to keep to the 0.3 per cent rate,’ explains Nigel Callaghan, pensions analyst at Hargreaves Lansdown.

While in theory Personal Accounts appear to be a positive step towards encouraging people, particularly the younger generations, to put money into a pension, there are some potential problems that could see the scheme fail.

As shadow pensions minister Nigel Waterson points out, ‘It is clear that many hundreds, or even thousands, of people would be well advised not to enrol in the new system because they would be no better off due to means-tested benefits.’

The Pensions Policy Institute (PPI) in particular has done a great deal of work to identify the groups who may be no better off, if not actually worse off, by being auto-enrolled into Personal Accounts.

Niki Cleal, director at the PPI, explains, ‘It is important to remember that many people stand to gain from the government’s proposals to introduce Personal Accounts in 2012. But there are some people who are at risk of low returns from them because they may lose eligibility for means-tested benefits as a consequence of their saving – for example, some people who may rent in retirement or low earners in their 40s and 50s who haven’t yet started saving.’

And a recent survey carried out by B&CE Benefits Schemes revealed 28 per cent of people are worried about being able to afford the four per cent contribution they will be required to make once Personal Accounts are introduced.

Just over a third of employees in the UK who are not currently saving for their retirement suggested that the cost of living prevents them from doing so. Financial commitments such as paying bills and meeting large mortgage repayments were specifically blamed by ten per cent; however, the report also shows strong support for Personal Accounts, with two out of three welcoming the government’s plan for auto-enrolment.

Confidence building
John Jory, deputy chief executive at B&CE, says, ‘We have to restore confidence in pensions, particularly with low to moderate earners. I think we should move away from the negative connotations associated with pensions by rebranding them “retirement pay”.’

He points out that ‘The common factor between holiday pay, sick pay and maternity pay is that you get some help from your employer but they don’t pay for everything. Your employer will help you, but if you want to do the things in retirement you dream of, you’ve got to save yourself.’

Nigel Callaghan agrees: ‘The developing pension crisis is like watching a car crash in slow motion; there needs to be a fundamental shift in people’s attitude towards long-term savings. As final salary schemes shut down, individuals have to take responsibility for their own retirement provision.’

One major concern, however, is the potential for yet another pension scandal, such as the mis-selling of personal pensions in the 1980s or the way in which the government, in the late 1990s, encouraged people to rely on employers’ final salary schemes.
This resulted in around 150,000 people losing most, or all, of their pensions and it has taken the government six years to agree to a financial settlement for those affected.

Potential pitfalls
Indeed, independent policy adviser Dr Ros Altman believes that Personal Accounts are a mis-selling scandal waiting to happen. She says, ‘Do politicians never learn? As currently proposed, Personal Accounts will get people to put money into something that is not good value. The government will not make sure the risks have been properly explained, even though everyone knew about such risks even before the policy
was introduced.’

She adds, ‘Politicians will claim success if they get more people putting money in, but those who contribute won’t find out for years that they didn’t get much, if any, pension out. Meanwhile, the financial companies want to earn fees on managing the assets, and the Treasury can see that people’s Personal Accounts will reduce the costs of means-testing.

‘None of this will be good for pensions in the long term, but the innocent citizen simply has no idea what is going on here – it sounds like another load of compensation claims could be in the offing some day!’