top stories

Comments from ACCA
April 2008

ACCA is pleased to comment on the contents of the consultation paper on the above. ACCA is a professional body representing over 120,000 qualified accountants who work in business, public practice and the public sector both in the UK and overseas. This response incorporates the thoughts of members of ACCA's Pensions Committee, which comprises senior individuals with experience of pensions as employers, trustees and investment advisers.

We set out below some general comments about salient matters and follow these with responses to some of the specific consultation questions posed.

Significance of charging levels to consumers

As a general comment on the issues addressed in the consultation paper we would agree that arriving at the optimum charging basis is going to be important in terms of maximising consumer involvement in the new scheme. Given that those in the target market for personal accounts are not likely to have any substantial level of disposable income, charging levels must not be viewed as an additional deterrent to participation.

That being said, we do not think that the charging structure is going to be as crucial in terms of maximising participation as achieving confidence in the system as one which is trustworthy and worthwhile. If, in due course, individuals in the target market take the view that saving via personal accounts is not going to provide them with a level of retirement income that is going to improve their financial position in retirement, or if they feel that they would really prefer not to pay part of their earnings into a pension scheme at all, then the charging structure is not likely to prove a significant factor in their decisions as to whether or not to remain in the scheme. Accordingly, charging should not necessarily be seen as the issue that will determine the success or otherwise of personal accounts.

The connection between the charging structure and PADA's costs

At this stage, the consultation is being undertaken in isolation from any information on what PADA's costs are going to be. Necessarily too, there is no account taken of the level of opt-outs, which cannot currently be forecast with any certainty. The fact that the consultation is taking place at the level of principle only means that the issue of cross-subsidy is not being considered.

We would suggest however that ways should be explored at this stage, as a matter of urgency, of identifying unnecessary costs to PADA and minimising them. In this context, PADA seems likely to have to assume responsibility for retaining records on and sending periodic information to very large numbers of people who come to the UK and work for short periods of time before leaving the country. While there is no option but to retain records on such persons, we cannot see any reason why PADA should go to the trouble and cost of sending periodic information to those who are not currently resident in this country, or of ensuring that their addresses are up to date. If necessary, we suggest that legislation should be introduced to ensure that personal account holders are not required to contribute towards the cost of such unnecessary activities.

The link between the charging structure and employer burdens

We believe that the approach to charging should try to reflect the concerns that have been expressed, by ourselves and others, as to the administrative burdens of personal accounts on individual employers, especially SMEs. Those employers that do not run their own schemes will be required to retain data on those of their staff that sign up for personal accounts and deduct and pay over contributions from themselves and their staff. They will have to do this by reference not only to wages and salaries but to bonuses, overtime payments and other income: this in itself will be problematic for employers, both in terms of determining who falls within the prescribed income band and of calculating contributions. Some employers will be obliged to administer staff involvement in two different schemes, the workplace scheme and personal accounts. Independent estimates of what these set-up and running costs to employers will be are far in excess of the official Government estimates.

If, therefore, the charging structure can be devised in such a way as to contribute towards the minimising of employer burdens this could help to achieve the Government's wider objectives. One material way in which employers could be helped would be for them to be entitled to pay contributions relating to non-fixed income into the personal accounts scheme at the end of the year. Any transaction-related charging component could, likewise, be calculated and charged for at the end of the year.

Disclosure of charging levels

We believe that, in keeping with the aim of inspiring confidence in the scheme among consumers, there must be full transparency in the information which is given to members and prospective members of the new scheme. Full explanations must be given, in understandable terms, of the basis and level of the charges imposed by the scheme. Information on charges should be given to prospective members at or before the point of automatic enrolment and at periodic intervals.

Our comments on specific consultation questions are set out below.

How should the principles of the PADA relate to the charging structure recommendation, and in what way should the principles best be applied in this context?

We consider that the key element of the statutory principles is that employer burdens should be minimised. If employers consider that the demands being made on them are excessive, in terms of time and cost, then the introduction of personal accounts may provoke a direct reaction from businesses which causes more problems than the new scheme might solve. In this light, we believe that the structure should be made as simple and straightforward as possible for employers to administer.

As regards cost, we agree that this should be kept to the minimum necessary to cover the costs of membership, given the likely financial resources of the target market. The structure of the new delivery authority should enable economies of scale to be made. But the Authority should avoid giving the impression that the cost of a pension can ever be negligible. In fact, if charges are set at too low a level, providers will not consider it worth their while to provide them. Charge levels must be appropriate for a product which has the aim of securing a material return for the member over a long period of time and which, in the process, necessarily involves the skill of investment professionals.

What are the charging structures currently used by the financial services industry, both for pensions and other financial products?

The annual management charge (AMC) imposed on members of stakeholder pension schemes and holders of personal pensions would appear to be the most straightforward option for personal accounts since it has the benefit of simplicity and clarity.

What are the rationale for these charging structures and which are relevant to personal accounts?

Flat annual charges have the virtue of simplicity, which, according to the research cited in the paper, is highly valued by the target market. A fixed annual percentage charge would appear to us to be likely to be attractive, in principle, in terms of encouraging individuals to stay in the scheme.

They can, however, have disproportionate effects on those who make high and low contributions during the period. To reflect differential levels of contribution, it would be fair to provide for transaction-based charges, which would centre around frequency of transactions and switching between funds. With personal accounts, even allowing for the annual cap on contributions, there will still be scope for relatively significant differences in contribution levels as between those at the top and bottom of the applicable earnings band. In the interests of fairness, therefore, it is important not to give those at the lower end of the earnings scale the impression that they are subsidising higher earners. It should also be borne in mind that many personal accounts are likely to remain dormant for long periods: again, the holders of such accounts should not be obliged to subsidise others.

It is also the case, we believe, that the payment of a fixed level of charge over the course of a long period of time is likely to have a material detrimental effect on the value of the member's fund.

It would therefore, in our view, be appropriate for there to be some allowance in the charging structure for the scale of contributions made by individual members.

Back to top