The government has admitted while it is confident the cost of personal accounts can be lowered as far as 0.3% over the long term, the true cost for employees "cannot be estimated with certainty".
Details of the Pensions White Paper – Personal accounts: a new way to save – just issued by the Department for Work and Pensions reveals the government is still pushing to lower the charges of personal accounts to as much as 0.3% over the long term, but in the short term anticipates charges can be lowered to as much as 0.5%.
“The government believes that personal accounts could deliver an AMC possibly as low as 0.5% in the short term and below 0.3% in the first 10 years.
"The government is confident that charges in the scheme can be radically lower than those currently offered to our target group. However, the exact charge cannot be estimated with certainty. The charges faced by individuals in personal accounts will be determined by factors that, at this stage, cannot be predicted with great certainty, including:
- Financing of up-front costs and early operating losses;
- Participation and contribution levels of individuals, and
- Administration and fund management costs, which will be revealed by the commercial process.”
It admits not all of the costs associated with setting up personal accounts had been covered by the Pensions Commission, such as the cost of ensuring employers automatically enrol employees and make the required contribution.
But the government is essentially handing responsibility for keeping the establishment costs of a central clearing house down and managing the delivery of personal accounts first to the Delivery Authority, and which followed at a later date by the Personal Accounts Board – removing responsibility for the creation, delivery and cost of personal accounts from the government’s hands.
And as part of ithe next stage of its consultation, the DWP wants to know how much flexibility the Delivery Authority and Personal Accounts Board should have to decide the charging structure.
The government also acknowledges whichever organisation finance the schemes, they are unlikely to be willing to do so losses for several decades in the likelihood they may earn money from it much later down the road so there will need to be some kind of financing to help set up personal accounts, albeit who might supply that funding – either government or private funding - is still open to debate.
Whatever the charging structure presented, the government suggests “the majority” of the cost of personal accounts will be covered by member charges.
How that charge will then be set is still no further forward as the DWP also offers four possible ideas for collecting member charges and is seeking further consultation on the matter, as well as guidance on when it might be appropriate to levy an additional charge. The four options are:
- An annual management charge;
- A contribution charge as a proportion of each contribution made by the member;
- A one-off joining charge perhaps equivalent to one month’s premium and spread over the first year, or
- A flat fee charged on a regular basis as long the member is part of the scheme.
In order to argue its case for lower charges, the DWP has presented case studies suggesting a 22-year old median man earning £23,000 a year and saving into a pension for 43 years can increase the value of their pension fund by 25% over their working life if the annual management charge is cut from 1.5% to 0.5%.
If he were to save with charges of 1.5%, the total value of the pot would be £63,000 - having been reduced by £24,000 through charges – while the fund will total £78,000 at retirement on 0.5% AMC as charges reduced the pot by just £9,000.
The DWP takes evidence of the ability to achieve the 0.3% long term charge from the US Thrift Savings Plan, the Swedish Premium Pension Scheme (PPM) and the Australian superannuation schemes, admitting while they are not directly comparable they “do show that costs in large-scale pension schemes can be driven down over time”.
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
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