While the government does its best to decide whether it is ‘naïve or misleading', as suggested in the Public Administration Select Committee's report, the question outstanding is how will this affect personal accounts?
In its report, published last week, the PASC sided heavily with the parliamentary ombudsman in finding the government guilty of maladministration over the handling of occupational pension schemes.
It blamed the loss of thousands of workers' pensions on the poor information provided by the government and the changes it made to the minimum funding requirements (MFR) which made occupational pensions less secure.
The government, however, has denied all responsibility on both reports, saying the changes to MFR made no difference to the security of worker’s pensions, and the communications and information provided by the government included caveats making it clear people could seek independent advice.
But having has to defend itself against two stinging reports against its handling of pensions, what lessons is the government learning over the implementation of personal accounts?
The government keeps reiterating although some people might want to opt-out of the national pensions saving scheme, it claims “for the majority of people it will be in their best interests” to sign up for the new system.
In its response to the Treasury Select Committee’s report, the government says it agrees it is vital communication with members of the new scheme is designed to help them, to make informed decisions about their saving.
It claims the pensions white paper outlines plans to develop “an information and communications strategy to support the introduction of personal accounts, including a high-level awareness-raising campaign, and specific information and support to employers, individuals and the voluntary sector.”
It also claims to be continuing work on “improving public understanding of pensions”, while working with the Financial Services Authority (FSA) and other organisations “on a broader financial capability strategy”.
In addition, research published by the Department for Work and Pensions (DWP) on employer attitudes shows employers would be most happy giving employees a standardised information pack from the government.
The findings show employers on the whole don’t feel equipped to give employees advice or information, while intermediaries are being deliberately kept out of the equation to try and keep costs low, so it seems the only option government has left is for itself to fill in the gap.
But considering the criticism it has been facing over its last batch of pension literature, will it be willing to take on the added responsibility when it has made it quite clear it will not be underwriting the scheme no matter which model is selected?
Mike Morrison, pensions strategy director at Winterthur Life, argues the responsbility question comes down to who is best placed to administer personal accounts, as the government needs to consider the risks it takes in becoming too involved, particularly in the setting up of default funds where one might outperform another.
“All this talk of one of the five key tests being personal responsibility and individual contracts seems to suggest whoever ends up running the scheme will make sure they will not be responsible for the performance of the funds,” says Morrison.
And the DWP certainly seem to follow Morrison’s train of thought, as Purnell has recently put forward the idea of a ‘delivery authority’, which would bring industry experts into the setting up process as early as next year.
Michelle Harrison, from IFA firm B J Harrison, says she thinks the idea of a getting the life and pensions industry involved is so the government has somewhere to pass the blame, if it all goes wrong.
She says: “If the government go their own way and force the nation’s workers to save for pension via an enforced system and which goes wrong, then they should be personally accountable. Any company who provides bad advice has to cough up. Why does the government get to employ double standards?”
Harrison says if the government does provide generic information, it is likely there will be a caveat at the very end of the document which states there will be no guaranteed returns and the government will take no responsibility if and when it all goes wrong.
“It’s about time the government explained things in plain simple English with consistency, but until you have that how can anyone trust a system like the one we currently have?” asks Harrison.
Dr Ros Altmann, an independent pension consultant and campaigner with the Pensions Action Group (PAG), says in her view the industry should not be going anywhere near personal accounts, given the framework of pensions in the UK at the moment.
She says it is impossible to see how personal accounts can work properly for the mass market, when over third of pensioners will end up on means-testing and lose at least 40% of any pension they accrue.
Even with an employer contribution, Altmann says this seems to be asking for mis-selling challenges, while any promises made by the government about personal accounts being 'safe', 'protected by law' or even 'guaranteed', cannot be believed as it said the same thing about employer final salary schemes, and then refused to honour its promises.
Altmann adds: “And if the government does not allow people to claim for mis-selling, then the individuals will be suffering from 'mis-buying' which is even worse than mis-selling, because the consumer has no-one to compensate them.”
She suggests stakeholder pensions have already proven how little confidence people have in pensions and just forcing them to put money in, or auto-enrolling them, is asking for trouble.
“Once the state pension is sorted out, personal accounts could be considered, but even then I am quite convinced a 3% employer contribution will become the maximum, not the minimum,” says Altmann, “So most people currently in employer schemes will end up getting less pension and those not in schemes are the most likely to opt out.”
“Overall personal accounts as currently proposed, will probably make pension coverage worse. I think the industry should leave it to the government to try to run this, until they recognise pension credit has to be scrapped. Without that, the industry is asking for trouble.”
Rachel Vahey, head of pensions development at Scottish Equitable, says liability for personal accounts is a difficult question as it will depend on the amount of risk government is willing to take.
She says: “The PASC report just demonstrates why the government won’t want any liability for personal accounts, and will want to keep some distance between what they say and what people do.”
The main areas of conflict, says Vahey, will be over difference in investment returns from similar funds and whether auto-enrolment is in people’s best interest while means testing still plays a significant role.
She says: “The government is going to have to publish research which proves it will always pay to save, and this latest report should send warning signals to government telling them they have to get this part of personal accounts right.”
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 Nyree Stewart on 020 7968 4558 or email [email protected]IFAonline
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