Making sense of the draft rules for personal accounts.
Personal accounts are the government's key initiative to help those with no access to a workplace pension save for retirement. In principle this is a great idea, but I do have concerns that they are very basic and are not making any allowance to actually engage with people. People are automatically enrolled, but do they really understand what they have been enrolled in? To make this scheme a success members need to be engaged and that requires successful communication. Something pension providers have been working hard on and could help the government with.
In April, DWP published draft scheme rules and orders and has asked for views on its proposals. DWP estimates between 2 and 8 million workers will be automatically enrolled into personal accounts - which in turn will involve several hundred thousand employers, many of which will be small businesses with little or no experience of running a company pension scheme. By 2050, the estimated amount of funds under management within personal accounts will be a huge £100-£300 billion (in 2007 values).
But while in theory, personal accounts will work like other multi-employer trust based schemes, making a success of them presents a huge challenge.
• Firstly, the scheme will be very large indeed.
• Most of the target employers who are - at best - inexperienced in operating pension schemes; at worst, it's placing a new burden on the totally uninterested.
• Then there's the target membership group. A large proportion will be low paid or transient workers who do not see saving for retirement as a priority.
• Administration of the scheme will be managed on-line by employers with little access to people who could solve queries. While automation and self-help -direct consequences of the government's insistence on very low charges - are undoubtedly great tools, they won't make for an easy birth.
• Finally and crucially, systems and processes will be unproven in this market.
To experienced pension practitioners, of course, these considerations have already raised alarm bells. The draft rules highlight the complexity of the scheme and the risks of it failing to deliver high standards of service - especially when members will have a ‘single life' personal account.
What this means is that membership could span decades of working for different employers and periods, as well as times where the individual is unemployed or has insufficient qualifying earnings. The scheme will be open to those not eligible for employer contributions and to the self-employed. Indeed some people may have concurrent multiple jobs, in an employed and self-employed capacity.
As far as set-up and collection of contributions are concerned, the draft rules explain that employed members will not be required to deal with the provider. The employer will handle all contribution deductions, resolving under or over collections, refunds and income tax adjustments where employees opt-out. Just to add spice, employers must automatically enrol employees as soon as they become eligible. Employers must observe tight deadlines for joining procedures to ensure employees are properly informed about the scheme on joining and follow the prescribed procedure if members choose to opt-out, etc.
And of course, if employers fail to deal with the challenges, the consequent loss of confidence by members could trigger mass opting-out!
The Conservative Shadow Secretary of State for Work and Pensions, Teresa May, confirmed at a CBI conference in June, that if elected, the Tories will not necessarily scrap personal accounts but they will hold a review as early as possible. However, she did raise concerns that Personal Accounts will not bring about the huge increase in pensions saving that was envisaged.
No matter who's in power, the pensions industry has a vital role to play in avoiding a personal accounts disaster. Quite simply, we need to ensure that employers realise the extent of the challenge ahead - and even more importantly, the simple solution: establishing a qualifying scheme, with a trusted provider, based on solid experience, before the 2012 deadline. This way they will have a chance to ensure that they can provide their employees with a tailored and bespoked arrangement which is valued and appreciated.
Martin Palmer is head of corporate pensions marketing at Friends Provident
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