Xafinity Paymaster believes it is possible to administer personal accounts at a cost of around £10 per saver, despite many in the pensions industry claiming such low charges are impossible.
In its response to the pensions white paper: ‘Personal accounts: a new way to save’, Xafinity Paymaster says it has carried out analysis work over the last year which suggests the proposed annual management charge (AMC) of 0.3% on personal accounts “will be a challenge but is achievable”.
The organisation reveals it has also conducted research, which included visiting Sweden and working with the Department for Work & Pensions (DWP), that suggests the most workable charging model will be flat fee charges to cover administration costs, while fund management charges should be applied as a percentage of assets under management.
Clare Ward, director of Xafinity Paymaster, says: “We believe the scheme can be administered for either £10 or £11 per saver per year depending on whether the financing of set-up costs are included.”
She says this could easily be translated into a quarterly charge which would create a flow of money to pay for the costs of running the scheme soon after its intended launch in 2012.
Ward adds: “We appreciate the many challenges in making the scheme a success and delivering it for the low AMC that Lord Turner envisaged, nevertheless we remain convinced that with the right approach this is achievable and a scheme can be constructed that is attractive to savers.”
However in its response to the white paper consultation, which closed yesterday, Standard Life argues the government is raising “unreasonable expectations about the costs of the new system”.
It says: “Realism is needed, about both the level and shape of charges. The majority view among financial service practitioners is that personal accounts cannot be delivered for an AMC as low as 0.3%.”
In addition it warns it is important not to focus solely on costs, as the cheapest fund management will not necessarily produce the best returns, and good returns will be more important to the eventual level of pension incomes than low charges.
As a result it says flat AMCs are not the most appropriate structure as this leads to a mismatch between high initial costs in establishing IT and administration platforms, with low income from charges in the early years, so a dual charge structure should be considered.
Meanwhile the Investment Management Association (IMA), in its 21-page response, says it should be left to the Personal Accounts Delivery Authority (PADA) to decide on the structure of the charges although it warns the government should avoid trying to set any kind of charge caps.
However it admits in broad terms there are two choices for the type of structure to be adopted, either an annual charge based on the value of the individual’s fund, or a combination of a flat administrative fee plus an AMC.
Although it says: “In operational terms the decision may depend upon financing available to the personal accounts system, since a flat administrative fee would facilitate early cost recovery.”
The different arguments on how charges should be levied in the new scheme follows a report published this week by the Pensions Policy Institute (PPI) which analysed five different methods against a set of government criteria.
In addition both Standard Life and the IMA in their submissions argued against the raising of the contribution cap to £5,000, and they also agreed the government should conduct further analysis into how the effect of means-testing on those people saving in personal accounts can be reduced.
Richard Saunders, chief executive of the IMA, says personal accounts have the potential to give a real boost to the savings culture in the UK, and the white paper proposals are a good start.
However he adds: “There is still work to do to keep the focus on the target market and to get the interactions with means testing right, and we look forward to working with the government to deliver those results.”
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 7034 2681 or email [email protected]IFAonline
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