Government assumptions about the costs of personal accounts could be incorrect if they have been developed from ‘over-optimistic' figures and modelling, warns the Association of British Insurers (ABI).
Giving evidence at a Work and Pensions Select Committee hearing on personal accounts, Stephen Haddrill, director general of the ABI, says it is very hard to say if the government has got its sums wrong as it has not made public the modelling and figures it has used.
However, he warns there are large uncertainties around assumptions the government has made in certain areas to try and meet annual management charges of 0.3%, such as the level of participation predicted in the new scheme.
Haddrill points out the government has done its sums on the basis of the kind of participation levels in the existing market which, he argues, is a high assumption to make considering it is trying to target those who don’t already have a pension.
At the hearing, the ABI also expressed concerns about the government’s assessment of persistency, as he points out in the existing market there is a 50% lapse rate after four years, which is “much more true at the lower end of the market” as people lapse because they can’t afford the payments.
More specifically, he alleges the government has been a “bit heroic” in its assumptions about the set-up costs of personal accounts, which it estimates at around £5 for each account, as the ABI argues work carried out by Deloitte suggests the actual cost will be closer to £20.
As a result, he says the ABI has concerns about whether the figures, particularly those buried in the detail of the white paper, are right, and as such he says costs could get down to just under 0.5%. But he warns this “would be a stretch, and would require everything to work well”.
He adds: “Our main concern over the delivery authority is that work needs to be done to stop it committing to a cost figure which cannot be delivered without a subsidy from the taxpayer.”
And when asked by the Committee if the government had got its sums wrong, and therefore the decisions on personal accounts had been based on incorrect modelling and logic, Haddrill admitted this could be the case.
He says: “We haven’t seen enough of their modelling to know for sure, but some of the modelling and figures are over-optimistic and assumptions from that could be incorrect. I think the particular flaw is their assumption of economies of scale which are not in practice there.”
Although Richard Saunders, chief executive of the Investment Management Association (IMA) - which supported the personal accounts model chosen by the government - says the costs of administration and fund management are reasonably well understood by the industry.
Instead, he says: “What are still unknown are the costs of collection and what the capacity is for linking it to PAYE and tax collection. We really need to know a lot more about this area.”
And Joanne Segars, chief executive of the National Association of Pension Funds (NAPF), also called for the government to disclose its modelling assumptions for the new schemes.
She says: “We need clarification from the government which needs to include the disclosure of their modelling to see what its does and does not exclude, in particular whether it includes the cost of communications to members which is a very important issue.“
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