Plans to raise the contribution cap on personal accounts to £5,000 will mean the decision to remove regulated advice could not be "sustainable", warns the Investment Management Association (IMA).
Speaking at a Work & Pensions Select Committee hearing on personal accounts, Richard Saunders, chief executive of the IMA, says concerns about the proposals for the higher contribution cap are more for the government than the industry.
Along with the Association of British Insurers (ABI) and the National Association of Pension Funds (NAPF), who were also giving evidence at the hearing, Saunders agreed the correct level for a contribution cap would be £3,000 as suggested by Lord Turner in the second Pensions Commission report.
He points out the rationale behind the £3,000 limit was that median earners contributing the maximum £3,000 per year would end up in retirement with a pension pot equating to a replacement rate of around two-thirds.
However, the government’s argument in its recent White Paper was people saving in personal accounts would not hit the two-thirds replacement rate level 25% of the time, so the solution was to raise the cap to allow them to make extra contributions when necessary.
Saunders says having built its own model, after the Department for Work and Pensions (DWP) failed to respond to an IMA request for details of its own calculations, the IMA discovered the £3,000 cap would result in people achieving better than a 75% replacement rate for 60% of the time, which demonstrates a wide spread of results.
He adds increasing the cap to £5,000 and putting a lot of money into the system would send the signal that people would need more income in retirement than they do during their working life.
Saunders also points out as the system is designed to be advice free, where you have an employee contribution matched by an employer contribution, suitability would not be an issue.
But he says: “If we are looking at increasing this by another £2,000, without an additional employer contribution, it becomes much less sustainable that [personal accounts are] outside the scope of regulated advice.
“If the government wants to keep personal accounts advice free, which means simplicity and ease of operation, we need to keep the cap at £3,000,” warns Saunders.
Meanwhile, on the issue of generic advice, which is expected to be included in the provision of personal accounts, Saunders says the information needs to be a simple explanation of how the system works, what will happen to the money, what the options are for more contributions, and what the options are for retirement.
Stephen Haddrill, director general of the ABI, adds the main problem facing the financial capability review being carried out by Otto Thoresen of Aegon is how to provide an efficient service which targets the correct people at the right time.
Joanne Segars, chief executive of the NAPF, suggests there could be a two-tier approach to advice, with basic generic information such as decision trees, or a helpline provided for issues such as whether to opt-in or out, the contribution level and the decumulation phase.
She also argues there could be a second-tier which provides face-to-face advice through the workplace, which she says would be much more cost efficient than the current financial services model of individual interviews.
She adds: “I believe lots can be done through tools like decision trees guiding people through processes. This information could be specific but it will be a long way away from any regulated advice as we know it.”
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