The government has an "overriding moral responsibility" to make sure personal accounts are suitable for everyone if it continues with the idea of auto-enrolment, says Legal & General.
In its response to the pensions white paper: ‘Personal accounts: a new way to save’, the insurer warns “anyone using the power of inertia to populate a scheme has an overriding moral responsibility to ensure that the scheme is suitable for the potentially millions of people who will be joining it”.
It argues personal accounts are not suitable for certain groups of people, including young people with families who would be better off with life cover and income protection, and those with high interest debt.
In addition, L&G points out the interaction with State means tested benefits also affects suitability, with various studies suggesting this would be around one in three of the population.
The document says while those close to State Pension Age can predict the effect of Pension Credit with more certainty, it warns outcomes will still differ widely from individual to individual.
It states: “Some will lose none of their savings, those on the standard slope of Pensions Credit will lose 40% of their savings, those on Housing Benefit will lose around 80% of their savings and women with an incomplete Basic State Pension can lose 100% of their savings.”
As a result, it warns the government “the responsibility towards these people is an onerous one and should not be taken lightly. We do not believe that the scale of this task has yet been appreciated or understood”.
It warns the problem “goes far beyond the provision of a few generic advice leaflets”, and suggests it will require a "prolonged and ongoing communication campaign on all available fronts", together with an extensive monitoring programme.
L&G warns: “Failure to accept this responsibility would bequeath a massive liability to the next generation of taxpayers, who would face the clamour for compensation from potentially millions of claimants who would feel that government had misled them and robbed them of their savings.”
The insurer also claims the government's current approach to the setting up of personal accounts will “involve a subsidy from the taxpayer that will be both substantial and long term".
L&G points out it does “not believe that 0.3% per annum will ever be attainable for personal accounts, and it certainly offers no prospect of generating later finance to repay the early year strain”.
It argues the use of a single fund management charge will generate very little income in the first few years of the scheme when funds under administration will be low, although it says it is in the “preparation and setting up of a pension plan that expenses are highest”.
And the company says as it regards state subsidies as being anti-competitive, it is with “some alarm” it has noted the white paper seems to admit that unless private finance is forthcoming the taxpayer will be asked to shoulder this burden.
It warns: “As personal accounts are aimed at a market segment that private pension providers have struggled to penetrate since charge capping was introduced in 2001, we suspect that most of the required finance will have to come from the taxpayer rather than the private sector.”
As a result, the insurer says while it acknowledges the government’s assurances it will pay attention to EU legislation on competition, it points out the government’s own figures on the expected amount of contributions into the new system will be £8bn per year - £3bn of which will come from existing savings.
It argues: “This £3bn will have been won in competition from other savings providers. This will have been unfair competition if personal accounts are benefiting from a state subsidy.”
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