Pension officials say current government proposals for pension personal accounts auto-enrolment are likely to increase administration costs but still will not reach the main target market.
Details of the White Paper presented by the Department for Work and Pensions in May suggest the government wants to require all employees over the age of 22 who choose to opt out of contributing to a personal account to be auto re-enrolled every three years.
It’s a stance which appears to have been hardened as policy by the DWP, as pension reform minister James Purnell has repeated the plan - to auto re-enrol all opt-out employees every three years - in his online ‘blog’ discussions with the public about personal accounts.
However, Rachel Vahey, head of pensions development at Scottish Equitable, says while her firm is in favour of the proposal to implement the three-year re-enrolment, there are still serious concerns about the cost and management of the administration detailing who is opted in and out, and whether this is likely to encourage young people to save for a pension – the core target market for personal accounts according to Purnell.
“The auto re-enrolment every three years is a good idea and generally we are in favour of it, but it adds to the administration and therefore the cost of offering personal accounts,” says Vahey.
“Someone is going to have to keep a tally of who these people are and when you have to write to them again every three years to tell them they will be opted back in.
“But we do not know whether it would be the central administration system which is responsible for this or the providers of the personal accounts who have to do it. And young people just can’t afford to save in a pension,” she continues.
Vahey’s comments follow evidence presented by the Association of Consulting Actuaries earlier this week suggesting one quarter of small employers – with less than 250 employees – expect more than 40% of their staff to opt out of personal accounts.
But Mark Twigg, account director at public relations consultancy Cicero, suggests the opt-out figure could be even higher, as his own research into the financial activity of young people between the ages of 18 and 40 indicates people cannot afford to invest long-term.
“The DWP findings see the opt-out rate as 36%, but we think it will be much higher,” says Twigg.
“The opt-out issue is a critical one, and we find in many respects because of the lifestyling issues young people are facing a situation where they simply cannot afford to save for a pension as well.
“If people have the option of opting out, they probably will to boost their salary. But if projections for the number of people saving in personal accounts are not met, it creates additional administrative burden. The number of people flowing in and out of the scheme at any one time means the information will be impossible to manage.
“It is not clear who will do this work – will it be providers, employers, and who is going to pay for all the extra work related to the personal account delivery system.
“And it then becomes even more important that people have access to information and advice, if they are making decisions about their savings every three years,” he adds.
Cicero has been conducting its own research to try and assess whether a person’s financial services habits become more sophisticated from the period when they leave education to “becoming settled” and reaching the age of 40.
As a result of their study, Twigg has found young people are first introduced to financial services through bank-related products, such as current accounts, credit cards and loans, but then are more likely consider some kind of savings vehicle from their mid-20s if prompted by their employer.
Part of this research has revealed few young people acquire a decent level of long-term investments, such as a pension, in later life unless they begin to save during that mid-20s period.
“There are only a very small number of people who go into investment products at that age. Where a person has a sizeable increase in assets held in investment products, we have found those people tend to have put money into the investments while in their 20s,” continues Twigg.
“With all of the lifestyling events of a person’s life from leaving education to 40, there are affordability issues, so creating a personal account where they are opted-in is slightly unrealistic. The crux of our research is we would expect to see large numbers of people opting out.
“They are more likely to follow a call to save where there is a long lock-away for a particular time frame, rather than saving for a pension which they cannot access. But the government seems more interested in putting everyone into a pension even when there might be better savings options for younger people, such as Isas.
“For a 25 year-old, it is not necessarily sensible for them to be saving in a pension, but they should be encouraged to at least be saving somewhere,” he suggests.
If you have any comments you would like to add to this story or would like to speak to its author about a similar subject, telephone Julie Henderson on 020 7968 4571 or email [email protected].IFAonline
Consultation closing 15 September
Across all public sector schemes
Proceeds being returned to investors