top stories

ACCA is pleased to comment on the white paper of the above title. This response has been prepared by ACCA's pensions committee, whose membership comprises individuals with long experience of pensions matters from a range of different perspectives – auditing, executive management and investment advice.

Summary

The white paper presents the Government's proposals for the setting up of a new system of personal accounts as a response to the problem of ‘undersaving' as identified by the Pensions Commission: it is suggested that some seven million people in the UK are currently not saving enough for their retirement to ensure for themselves a standard of living in retirement that they would consider to be adequate, and also that 80% of the population accept that they will need more than the basic state pension to live on. The solution proposed in the white paper is to introduce a flexible, low-cost nationally-organised scheme whereby individuals would be auto-enrolled in the scheme and both employer and employee would be required to pay contributions.

We agree that action to address and resolve the UK 's pensions problems should be given high political priority and welcome the fact the Government has moved swiftly to bring forward firm proposals for change following the conclusion of the work of the Pensions Commission. We believe, however, that long-term plans for pensions reform should be developed on the basis of a strong consensus on what is achievable in terms of helping people to accumulate worthwhile retirement income. This consensus view must take into account all the reasons why current problems have arisen – as we said in our response to the white paper ‘Security in Retirement' in May 2006, some of these problems are of the Government's own making. In our view, the proposals for personal accounts are not based on a sufficiently solid foundation of evidence or logic to merit this consensual support. In particular, the Government has not explained adequately why it would be in individuals' interests to join this new scheme or how the new scheme would avoid causing further damage to the UK 's occupational pension sector. It is certainly not clear to us how this new scheme can make a real difference to the problem of undersaving as long as people in work believe that mean-tested benefits are going to be available to supplement their entitlement to the basic state pension.

If this new pillar of the UK 's pensions infrastructure cannot be built on surer foundations then the possibility must remain that yet another high-level review of pensions will need to be undertaken in the not too distant future.

In the following paragraphs we make some general points in support of the foregoing comments, and further on address specific consultation questions. 

The context in which the changes are being proposed

Since the various reforms now being proposed subsequent to the Turner review are a reaction to the accumulation of problems confronting the entire pensions industry, in both the public and private sectors, we feel that the proposals on personal accounts must be considered in the light of those problems. They include the following:

• Government action which has mitigated actively against the ability of pension funds to accumulate wealth for their members. This has affected both defined benefit and defined contribution pensions.
• Frequent vacillations in Government policy which have damaged individuals' ability to plan for the future and undermined confidence in pension schemes as long-term savings vehicles.
• The effects of inflation on the ability of schemes of all kinds to provide retirement income over increasing lengthy periods of retirement.
• The shortcomings of annuities as products which can provide decent levels of retirement income and offer an adequate incentive for individuals to save via defined contribution schemes.

These issues, among others, are likely to have a direct effect on the preparedness of individuals in the target market to save for a pension and on the capacity of the proposed new scheme to make a positive difference to the retirement income of such individuals. While we very much support the principle of long-term saving, and support official efforts to encourage more of us to do so, we do not believe that the new scheme should be presented as being one which is always going to be in the best financial interests of all those who are due to be auto-enrolled into it, since we do not believe that this will be the case. The combined effects of inflation and increasing longevity stand to have a particularly material effect on the annuity value of small money purchase funds. If it is not going to meet the criterion of being in savers' financial interests, we suggest that the rationale of the plan needs to be re-thought.

Capacity in the target market

The white paper suggests that the main target market for personal accounts includes workers on moderate to low incomes, especially those below £15,000, young people in their 20s and 30s, and women. This is much the same target market as was identified for the stakeholder pension when that was introduced in 2000. While that project has proved to be a worthwhile addition to the range of savings vehicles in terms of facilitating pension provision for non-earners – indeed it stands to make a material difference for many in that category - the stakeholder pension has not made a conspicuous impression in terms of increasing the numbers of low to middle income earners saving for a pension.

In framing any new vehicle for pension provision, therefore, it is important that the Government acknowledges why the stakeholder project appears to have failed in its aim of bringing about higher levels of retirement saving in the target market. There is one very obvious reason why this may be the case, and that is that those in the target market cannot be expected to have sufficient levels of disposable income to enable them to save voluntarily for a supplementary pension.

We accept that the concept of auto-enrolment to the new scheme will address the problem of inertia and will ensure that initial membership of the scheme is high. But the white paper itself notes that one third of all personal pension contracts lapse after four years and that this rate is actually increasing. This suggests that even where individuals make a conscious decision to start a personal pension plan, a high proportion of them decide within a short time that they cannot justify maintaining it. Given this evidence, we think it is reasonable to assume that, whatever they may say in principle about the good sense of saving for a pension, those who are automatically enrolled into personal accounts will be even less prepared to stay in than those who make a conscious decision to start a personal pension. We suspect that saving through personal accounts will be a low priority for those in the target market and that the drop-out rate will be substantial.

In our view, therefore, the Government must think seriously about how realistic it is to base a major pillar of the new pensions environment on the questionable presumptions that most if not all low earners will save through the new scheme and that this will resolve the problem of under-saving.

The new delivery structure

The establishment of a wholly new delivery structure and IT system to administer the personal accounts system seems to us to be an expensive over-reaction to the problem being addressed. We remain of the view that, if the policy objective was to oblige more employers to contribute to supplementary pensions for their staff, the established stakeholder pension framework could have been adopted and adapted. As things stand, we suspect that there may be some negative consumer perceptions of the security and integrity of a large new government bureaucracy which could prove counter-productive to the pursuit of the policy goal. Experience also suggests that charges for running the new system will also prove higher than is being anticipated.

The advisability of saving through personal accounts

There is no provision in the proposals for individuals to take financial advice before signing up to the personal accounts system. It seems to be assumed that the very fact that members of the new scheme will be making contributions into a pension scheme will be in their interests. But it is not evident that this will be the case for everyone.

Personal accounts are likely to present a significant challenge to financial advisers. At present, it would appear very unlikely that an adviser would feel able to advise any individual to save through a personal account on the basis proposed. This is because of a combination of factors – firstly, the amount of money that is likely to be accumulated in an account, secondly how that accumulated fund will be dealt with on retirement, and thirdly the likely relative position of the saver vis-à-vis the non-saver. On the other hand, it has recently been suggested that it would be irresponsible for advisers to advise their clients not to save, and to rely on means-tested benefits instead, on the basis that it would be wrong to rely upon residual state benefits being available in decades to come in the same way that they are today.

Forecasting what state benefits are going to be in the future is indeed one of the uncertainties of retirement planning. But unless the Government is prepared to rule definitively now that means-tested benefits will not be available when today's workers retire, the latter are likely to proceed on the assumption that no radical action to withdraw such benefits will be taken. Action of this kind does seem unlikely given that a third of UK households are now reported to be reliant on state benefits.

The assumption that means-tested benefits will remain as a fall-back option is, accordingly, one which is likely to be retained by many, advisers and workers alike. In providing financial advice, advisers will therefore consider the relative positions of a client if they saved through a personal account or did not save for a pension at all.

The first thing an adviser will consider is whether a client on a low to modest income will be in a position to save for a personal account, or for a defined contribution pension of any kind, bearing in mind competing pressures on his finances. An aggregate contribution rate of 8%, based on a low to modest income, will not normally be considered to be sufficient to generate a reasonable retirement income.

Then he would have to consider how any accumulated fund would translate into an income stream after retirement – at this point, the personal account holder will be exposed to the commercial annuity market. The full implications of this must be made absolutely clear to prospective savers before they join the scheme.

The requirement for personal account holders to annuitise their savings may be especially inappropriate. Annuity rates may recently have risen slightly after a long period of decline, but it remains the case that, for a man of 65, the best that he could hope for a pension fund of £100,000 would buy a level joint life annuity for him and his wife of little more than £6,000 pa. Few funds accumulated through personal accounts may attain that level. The prospect for personal account holders of having to convert their funds into an annuity by the age of 75, and seeing their accumulated savings disappear on death will not help encourage take-up. A deeper problem facing the Government in generating support among the target market for personal accounts is that there have been such frequent changes in Government policy with regard to money purchase pensions and annuities that long-term confidence in them as savings vehicles continues to suffer – the recent changes with regard to SIPPS and ASPs are a case in point. Also, if at some future stage tax relief on contributions were to be ended, the withdrawal of the tax benefit would be a material loss to the saver.

The third factor that an adviser would take into account would be the crucial issue of whether a saver with a modest pension saved through personal accounts, and which would then be traded for an annuity, would be better off financially than a person who had not saved at all and was dependent on means-tested state benefits.

It seems evident that if an individual is going to be at least as well off in retirement by depending on state benefits, then that person should not be encouraged to save for a supplementary pension, whether by the Government or anyone else. At this stage it looks very doubtful whether personal accounts would be a sensible option especially for the low-paid, women with interrupted careers and those at a late stage of their working lives. In the light of the report of the Parliamentary Ombudsman in 2006, and earlier events, the Government needs to be very careful about how it goes about encouraging people to invest in personal accounts.

Impact of personal accounts on existing non-state provision

The white paper says that the Government wishes to support employers who wish to offer their own occupational pension schemes. Accordingly, it will place caps on the contributions which may be made under personal accounts.

But under the proposals, employers would have to seek an opt-out from the new scheme if they wished to avoid having to automatically enrol their staff in it. This process will inevitably cause employers to review whether they wish to continue running their own occupational schemes or whether they might wind them down and enrol at least all new staff in the future national scheme.

In the light of investment conditions and the increasing regulatory burdens of recent years, many employers have gone through the process of reviewing their commitment to defined benefit schemes. This has led to a significant reduction

in the number of schemes being closed altogether or at least to new members. Recent research has found that where employers have closed their defined benefit schemes and offered their staff access to a defined contribution scheme instead, the level of employer contribution has declined substantially from what it was under the final salary arrangements. While this may make economic sense from the perspective of the individual employer, it does not help to resolve the Government's problem, which is to help ensure that individuals accumulate satisfactory levels of retirement income: in fact the opposite is the case.

The review process inherent in the proposals would, in our view, add new momentum to the and the outcome could very conceivably be a further drift away from good occupational schemes.

Moreover, the Government will need to bear in mind that, with the introduction of the new scheme, there will be implications for the workplace generally. There will be two classes of employer – those which are in the new scheme and those which have opted out, and workers in the former category may have suffered adverse financial consequences, in terms of wage and recruitment freezes, as a consequence of the employer having to fund contributions to the new scheme.

Financial impact on small firms

The potential impact of the personal accounts system on small firms, in terms of time spent and financial cost, must be a matter of substantial concern. Employers would be required to deduct contributions from staff pay on a regular basis, pay them over to the new delivery authority and provide requisite information to their staff. The administrative implications may be greater where staff are paid on a weekly basis. There will also be additional administrative problems with regard to the employment of seasonal workers.

The DWP's revised estimates of the administrative costs to employers are for set up costs to be around £230 million and for on-going annual costs to be around £90 million. These figures are somewhat higher than the initial estimates provided in the White Paper ‘Security in Retirement' in May 2006. Research carried out by Manchester Business School (MBS), however, using compliance cost data for the PAYE system, has estimated that on-going costs alone could result in an annual additional compliance cost of £1.3 billion for the UK 's SME sector. Even that estimate does not take into account internal staff time and professional fees that businesses will incur in learning about the personal accounts scheme and deciding whether or not to opt out. An on-going burden of this level would further reduce the profitability of SMEs and lead to an overall reduction in corporation tax revenues of £397 million.

We appreciate that the MBS figures are only estimates, as are the DWP's. But an increase of anything like this amount in SMEs' administrative burdens – fifteen times the DWP's own estimate - at a time when the Government is officially committed to cutting red tape and business compliance costs, would be an unacceptable price to expect SMEs to pay.

The administrative burden

The proposals provide that a worker who has enrolled in the personal accounts system will be able to continue to contribute to his or her account on changing jobs. We agree that the ability for workers to continue to pay into the scheme and to accumulate benefits is an attractive element of the scheme.

But the proposals assume that a worker will only change jobs to move to an employer that is also participating in the personal accounts scheme. Where a worker moves to an employer which has not opted out, and which continues to operate an occupational scheme, this will create a problem. It is not clear what would be the implications in such a case for the employer. If that employer were to be expected to make separate arrangements to deduct contributions from a worker's salary and to pay these – along with the employer's contributions – to the personal accounts authority, and to keep separate personal accounts records, then this would amount to another time-consuming and expensive burden on the employer. The prospect of facing this dual pension obligation will no doubt be considered by employers when they go through the process of deciding whether or not to seek exemption.

Consultation issues

Notwithstanding the above reservations about the personal accounts model, we offer the following comments on some of the specific consultation issues posed in the white paper.

• The target group for personal accounts
  We would be in favour of exempting those who have reached the age of 60 in 2012 from auto-enrolment into the new scheme on its launch, on the basis that it would not be likely to be in their financial interests to do so. With respect to the standard period for repeat automatic enrolment of those individuals who had previously opted out of the scheme, we think that this should be carried out no more frequently than every three years.
• Delivering personal accounts
  We note that the DWP intends to work with the new delivery authority and the various regulatory organisations to develop the framework of information to be provided to personal account holders. With respect to the information to be provided to employees prior to enrolment in the scheme, we suggest that the nature of the defined contribution scheme must be explained, together with a summary of the options likely to be available to them once they retire and reach the age when they have to convert their savings into an annuity. The Government has to make it very clear that saving through personal accounts will not in itself entitle savers to a regular income of any amount which can be known in advance. Thereafter, employees will need to be informed, via their wage slips and on an annual basis, about the amounts of their own and their employer's contributions to their account and the associated tax contributions.
  
  As far as employers are concerned, they need to be told exactly what their responsibilities are with regard to deducting contributions and providing regular information to employees. In particular, they need to know how they are to calculate the deductions and their own contributions: the white paper is not specific about exactly what figure the employer's 4% contribution is intended to relate to.
  
  With regard to the provision of investment choice to personal account holders, we suspect that, for many individuals, this would simply increase the potential for confusion. Faced with having to choose between one of a number of investment options which they do not understand (and which they are unlikely to be willing to pay for professional advice on), the possibility is that people will conclude that the whole exercise is beyond their ability to manage and will prefer to opt out.
• Charging for personal accounts
  It is evident that, if the new scheme is to have any chance of success, administration charges will have to be kept as low as possible. The Government says it believes that charges can be kept to ‘possibly' as low as 0.5% in the short term and below 0.3% in the long term. Charges of this level, provided they could be justified without detriment to the security and quality of the funds invested, would certainly help to promote involvement in the scheme. But the Government admits at the same time that the exact charges cannot be estimated with certainty, given substantial uncertainty about factors such as participation and contribution limits and administration and fund management costs. We also note that the charging level for stakeholder pensions has been allowed to increase to 1.5%. Accordingly, estimates of the future charging level must at this stage be treated as speculative.
  
  As regards the elements of the charging structure set out in paragraph 4.12, we do not think it sensible to levy a joining charge. This would be contrary to the principle of auto-enrolment and could provoke a negative consumer reaction.
• Employers offering non-occupational workplace arrangements
  As stated above, we accept the logic of the proposal to auto-enrol staff into the new scheme, with provision for employers to opt out where they offer an acceptable alternative scheme. We welcome the proposals to allow exemption through self-certification, as long as the exemption criteria are made sufficiently clear. Cases where the employer contributes to employees' stakeholder pensions on the same level or higher as will be required for personal accounts must be brought within the arrangements for opt-out.
• Approach to compliance
  It is right that, should the proposed scheme be set up, employers should comply with all their responsibilities, including the responsibility to arrange for periodic re-enrolment of those who have previously opted out. No employee should be forcibly prevented in any way from exercising his right to participate in the personal accounts scheme. The regulatory regime set out in paragraph 6.47 seems sensible enough. The proposal regarding the establishment of a whistle-blowing helpline, while potentially useful in itself, would have to be accompanied by provisions ensuring that no workers should suffer any detrimental action from their employer as a result of any member of the workforce having communicated information via the helpline.
• Contribution limits
  We think £5,000 would be a reasonable limit in the circumstances.

As a concluding point, we would add that, as with any pension scheme, the personal accounts scheme will be a long-term savings vehicle and, in view of the character of the target market for the exercise, this vehicle can not realistically be expected to enable savers to accumulate substantial funds: many individuals will feel that there are better long-term investment options for the capital that they able to invest. The Government must therefore be open and honest about the potential that personal accounts offer and must be prepared for there to be some adverse reaction from those who have saved through them and converted their funds into income streams following retirement. Such adverse reaction is especially likely in the early years of the scheme when people have been able to accumulate only very modest sums during their period of their membership of the scheme.

Back to top