James Purnell, Minister for Pensions Reform, has hinted the government's response to the personal accounts white paper will reject the idea of including any additional benefits or "bells and whistles" to the scheme, such as death benefits, or early drawdown.
Speaking at the Association of British Insurers (ABI) conference: ‘Thinking for Tomorrow’, Purnell confirmed the government’s response – setting out further details on the new system will be published in June.
In his speech he says the consultation is focused on refining policies, but adds the government believes there are two central principles, which are “very important to have as guiding principles in taking personal accounts through Parliament”.
They are to keep it simple and to make it independent not only from government and politicians, but also from other third parties who, however well-intentioned, may make decisions which will not benefit the members, so there should be “cultural and legislative independence from the start”.
Purnell argues the system has to be simple to meet the needs of the target market, by providing simple and limited choices on whether to opt in or out and how much to contribute, and he warns as costs need to be kept low, a “no-frills scheme will make for lower costs”.
However, he says some of the responses to the consultation suggested offering members additional benefits aside from the pension, such as death benefits and early drawdown.
But he says: “I’m not going to prejudge the response, but it’s worth saying the key objectives of simplicity and low costs mean we have to be wary of adding bells and whistles. Where adding things only some people may want could jeopardise the scheme for the majority of people.”
In his speech the Minister also raised the issue of auto-enrolment into contract based schemes such as Group Personal Pensions, which is prohibited through the European Distance Marketing Directive.
He says: “We believe quite clearly auto-enrolment is the best way of overcoming inertia, but we don’t want to undermine the success of GPPs, so we are working to set out exemption criteria for these schemes.”
However, Purnell points out to get to a world where GPPs are exempt, it needs to answer some important questions over the next few weeks and months, including would a modified form of auto-enrolment be effective? And looking for innovations such as making the scheme trust-based for new members.
He adds: “I don’t think we yet have a solution, but this is a plea to work together to find a solution which can support the GPP market.”
In addition, Purnell suggested the introduction of personal accounts could provide increased opportunities for the life and pensions market, particularly in the area of annuities.
He admits the government doesn’t “envisage personal accounts offering their own annuity products”, and says members will be able to access the Open Market Option, as current pension holders can, which would create a “significant chunk of new business”.
Purnell also argues the new system will complement rather than compete against the existing market, as personal accounts will be at one end as “the basic option and a way for employers to meet their obligation”, while the “industry has a five-year head start” to design and build new products and services.
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