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Thursday December 7th, 2023 

News Archive - January 2009

Personal Accounts - the story so far


You have probably not heard about Personal Accounts, but I'm sure they will be hitting the news over the next few years. They are the latest attempt by the Government to fill the UK's vast 'savings gap' by encouraging the public to put more money away to fund their retirement.

Company pension provision for employees has become much less generous over the last 10-15 years, with many final salary pension schemes being closed to new entrants or wound up. Money purchase schemes are now the norm, meaning that falling annuity rates and tumbling share prices have a direct effect on members' pension values (and their future retirement income). Under a final salary pension, these risks are borne by the employer and the scheme itself.

The Government's first attempt to boost pension savings was to introduce Stakeholder Pensions in 2001. Stakeholder pensions failed to close the savings gap. There is no requirement for an employer to pay into a Stakeholder pension on behalf of their employees. Because of this, the employees do not see them as valuable and often prefer to make their own pension arrangements (or have nothing at all) in preference to taking out a company Stakeholder pension.

The new plan is to introduce Personal Accounts in 2012. Despite the name, this is effectively a pension plan. All employers will be compelled to set up Personal Accounts for eligible employees (unless they already provide a pension scheme with an equivalent level of contribution themselves) and contribute a percentage of their gross salary (between an upper and lower limit) on their behalf. Employees will be able to opt out of making a contribution.

The plans as they stand at the moment are as follows:

· From 2012 all employers will be obliged to contribute to Personal Accounts for their staff unless they have a 'quality pension scheme' already in place - by this they mean a scheme which has an equivalent or superior level of contribution than Personal Accounts.

· For those employers without a 'quality scheme', they will be obliged to contribute 3% of 'band earnings' - any earnings between around £5,500 and £40,000 - to a personal account for all eligible employees between 22 and State Pension Age.

· Employees are expected to contribute 4% of their salary within the above band, and they will receive a further 1% in tax relief. However, they have the option to opt out in which case only the employer contributions will be paid in.

· Employees will be opted back into a Personal Account every three years or when they change jobs, so they will have to actively avoid making contributions if that is their preference.

· There will be no transfers in or out of Personal Accounts. If you change employers then you can simply continue payments to your personal account and your new employer would start making contributions. Alternatively you could join your employer's pension scheme if they have one which is superior.

The issue of compulsion (forcing people to contribute to a pension) is not a popular one, which is why the Government is still providing a get-out clause of an 'opt out' for the general public. No such luck for employers, who will be saddled with the admin burden and associated cost of making contributions for all eligible employees (those who have a high turnover of staff will find this particularly onerous).

There are several reasons why I personally think that Personal Accounts will be a failure.

Money purchase schemes do not work well for low earners, but it is these low earners that Personal Accounts are designed to help. The Government projections expect the cost of administering Personal Accounts to be very low (0.3 - 0.5% per annum) - even lower than Stakeholder pensions, whose charges at 1% per annum were found to be too low to make them a viable product for many insurance companies to offer. There is no real explanation why the Government expect the ongoing admin costs to be so low. Their track record of providing efficient computer systems to cope with large-scale projects like this is not great (see - Child Support Agency). Exactly who is going to volunteer for the job of running the scheme for no money using a magical, as yet unwritten, super-efficient admin system?

There is no cost built into the plans for any form of advice. Joiners will be expected to make choices via a 'decision tree' or just by reading documentation - the target audience for Personal Accounts will not want to wade through any paperwork. And historically, when faced with a financial decision the majority will choose to do nothing rather than make a change. The Government is banking on this to ensure that people 'opt in' through inertia rather than taking the decision to opt out.

I suspect that the general lack of trust in pensions (and the fact that it will hit their pockets) will cause the masses to sign the form to opt out. If this happens, the scheme has failed.

One big problem that the Government needs to address is that of means testing. As it stands now, pensioners receive top-up benefits if their overall income is below a certain level. These benefits provide a disincentive to save for many low earners, and unless the benefits system is reformed then Personal Accounts will end up being a huge administrative waste of money with no net benefit to the people it purports to help (see also - Tax Credits, another Gordon Brown stroke of genius).

The current financial crisis is not helping matters. Employers are begging the Government for assistance to avoid closure - the promise of a new drain on their resources in a few years is not likely to go down too well. The bad news (did you need any more bad news?) is that these plans are already law - the Pensions Act 2008 received Royal Assent on 27 November 2008.

Employers need to address this issue now rather than later - call Mulberry Financial if you would like a meeting to discuss corporate pension planning.

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