2007 will be a crucial year in the history of personal accounts. This is when we will nail the overriding objectives and scope for personal accounts and from that will fall the design of the scheme and responsibilities of the delivery authority.
The bottom line is that we have to encourage more people in the target market to save more money. That means focusing on those low and moderate earning employees who don't have access to an employer's scheme.
But what does that mean exactly? In December, the Government predicted that personal accounts could have between six and ten million members with private pension saving of around £8 billion a year. All this sounds impressive until you consider that the Government later conceded that only around 50% of this money would be new saving. In other words, at least the other 50% of the personal accounts money would be recycled from existing savings.
Obviously, this is worrying. There's often an idle assumption that the target market doesn't save anything at all at the moment towards its retirement. But these Government assumptions suggest they do save, and that the Government expects this saving to be re-directed into personal accounts.
This backs up AEGON's own analysis in this area. But our research paints a bleaker picture. For several reasons, we think 50% may be an over-estimation of the new money expected.
First, the author of the 50% figure lamented the fact that there were no international or UK previous experiences to base assumptions on. So, naturally we have to view the results with caution.
Second, the Government, in its research, estimated 'reasonably low' rates of opt-out - yet, in the White Paper put this figure in the range 20% to 50%.
Thirdly, we think the level of current saving by the target group is much higher than the Government has predicted. In fact, our analysis of research by Deloitte showed that people in the target market have been saving an average of £1,600 a year, just under 9% of average income. Around half the target group, just over 4 million people, claimed to be making average pension contributions of just under £1,000 each year, equivalent to 5% of income. That's a remarkable set of figures.
So, if part of the target market is already saving something, what is going to be their most likely reaction to personal accounts? It all leads to the suspicion that those who already save will simply redirect their saving into personal accounts, and those who don't are most likely to opt-out rather than start saving.
We do have the opportunity to tackle this. The Government could start by carrying out some detailed research looking at exactly how much the target market saves now and, importantly, why they don't save more. We need to understand people's motivations and their savings habits. If they truly believe they don't have enough disposable income to save, introducing a new type of pension plan (however cheap) will not make any difference.
We could also design auto-enrolment by allowing employers to pay 3% into any pension vehicle, to exempt them from having to pay into personal accounts. If this contribution doesn't have to be dependent upon the employee also paying into the same pension vehicle, it maximises the chance that the employer contribution is additional to current saving, rather than simply replacing it.
Unless it takes a realistic view, the Government risks failing in its key test of pensions reform to stimulate fresh saving.
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