A ‘light touch' regulatory system should be introduced for the existing pensions market to allow current schemes to operate on a level playing field with personal accounts, claims the Association of British Insurers (ABI).
In its response to the pensions white paper: ‘Personal accounts: a new way to save’, the ABI has raised a number of issues with the proposals which it says at the moment will threaten the existence of the current pensions market.
The organisation points out regulation should not be an obstacle to consumers starting to save now, before personal accounts are introduced in 2012.
But it argues existing FSA regulation puts high costs on the existing pensions market, as financial advisers must establish ‘suitability’ before they can sell a pension, including the continuing requirement under ‘RU64’ to demonstrate that a personal pension is at least as suitable as a stakeholder pension.
The ABI claims the risk to existing pension provision is very real, not only with through the minimum 3% employer contribution which is much lower than many existing occupational schemes, the ABI is concerned the lighter-touch regulations for personal accounts will see more employers switch to avoid the regulatory burden.
The document states: “In practice, the risks for employees in personal accounts and in group personal pensions (GPPs) and employer stakeholder schemes are the same and the same level of regulation should apply.”
The trade body warns current proposals mean personal accounts will compete directly with existing pension and other saving products, and there is a real concern they will be offered at less than their true cost, gaining an unfair advantage in the marketplace.
The document points out the “risk of a state subsidy, ultimately funded by taxpayers, is high”, as in the white paper the proposals only suggest a ‘majority’ of the costs will be recovered from account holders.
The ABI estimates with an AMC of 0.5%, personal accounts would be unable to cover their costs and would require a government subsidy of around £1bn over the first ten years, while a 0.3% AMC would require a subsidy closer to £1.5bn.
This follows research published yesterday by the Pensions Policy Institute (PPI) on the different types of charging structure which suggested a flat AMC for personal accounts would mean after 2012 borrowing to cover costs could range from £1.7bn to £4.5bn, depending on the cost of capital.
So the ABI warns: “State subsidy of personal accounts would be entirely unacceptable, and distort the existing market. The government should clarify this issue very soon.”
The organisation also suggests out a firm timeline is needed for the appointment of staff and members for the personal accounts delivery authority, as the new body will be “crucial” in “avoiding the planning blight” which will affect the existing pensions market if the white paper proposals are not amended.
The ABI response also includes recommendations to keep the contribution cap at £3,000 to focus on low and median earners with no current saving; exemptions for good quality schemes; and ensure the EU Distance Marketing Directive does not apply to GPPs with employer contributions of 3% or higher to allow them to introduce auto-enrolment.
The organisation also warns the government must address the question of who is liable if something goes wrong, as it warns “if members do not achieve the returns they expect, government involvement in the design and launch of personal accounts may easily be interpreted to mean they are ‘safer’ than other forms of pension, or that the government would not let them fail or under-perform”.
Stephen Haddrill, director general of the ABI, warns unless changes are made, the “laudable aim of more savers, saving more will simply not be achieved”, instead he predicts the opposite will occur, with “serious consequences for Britain’s future pensioners”.
He adds: “Failure to act now will lead to a new, taxpayer-subsidised pension that will tempt employers to abandon their schemes into which they make contributions at higher levels than expected in personal accounts.
“The government must ensure that personal accounts are fair for taxpayers and the millions of people who are already saving for their retirement in good quality pension schemes.”
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