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BeeHive  >  BeeLines  >  2008  >  May  >  Easier said than done revisited

Easier said than done revisited

I didn’t think I’d ever write this, but I’m really pleased that the Government decided to design and build a private sector funded pension plan.  I know you’ll all think that’s a bit of a u-turn for me what with all I’ve said about this proposal to build a national scheme of personal accounts, but I do mean it.

We’ve had structural problems with our private pension system in the UK for years now; it’s just something we’ve taken in our stride and got used to.  Problems with persistency of saving; problems with suitability of saving; problems with being fair to individuals within groups; problems with giving information on pensions; problems with giving advice on pensions; problems with distributing schemes in an imperfect environment with so many pensioners eligible for means-tested handouts; problems with fairly remunerating distributors; problems with ever-changing legislation; problems with mortality shifts; problems with transferring pension rights; problems with multiple tax regimes; problems with legacy entitlements; problems with appropriate investment options linked to individual attitudes to risk; problems with inheritance of pension funds; problems with trust law; problems with administration; problems with building profitable products; problems with etc. etc. (you fill in the blanks.)

 I don’t think anyone outside our industry would know anything about these problems, or care less. 

A few years ago now our Government decided we weren’t doing a particularly good job of getting pensions out there to the public so they came up with the idea of Stakeholder Pensions for us.  They designed the product, enshrined it in legislation, forced all employers with more than four employees to set one up if they didn’t have a pension scheme for all their workers and, through doing so, managed to increase the number of pension schemes in the UK from about 100,000 to around 400,000 overnight.  To one way of looking at it that was a great success, an unprecedented growth in pension schemes.  Unfortunately most of the 300,000 new pension schemes had, and still have, no-one in them.  We even invented a new term for such schemes in our strange pension argot; we call them ‘shell schemes’.

Like most people in the industry I was pretty annoyed when Stakeholder Pensions were imposed on us back then.  It seemed to me that it would have been far more sensible for our legislators to have tackled the very real structural problems we face when designing, distributing and profitably managing private sector pension schemes than to have come up with a simple product solution that itself was subject to and beset by the very same problems.

But that wasn’t apparent at the time that Stakeholder Pensions flopped.  It might have been to people in the industry, but outside of that strange group no-one would have known, or cared.

The national scheme of personal accounts is different to the attempt to get the Stakeholder Pension to take root.  It comes with so-called soft compulsion as a feature to take advantage of the power of inertia.  The automatic enrolment of ten million people into pension saving will surely result in more people saving.  But they will be saving in a private sector pension scheme that will experience all the same problems that existing schemes have to and have had to deal with.  Those designing the detail of personal accounts right now are struggling with the fairness issues inherent in the type of charging structure the new scheme should have if it is to be fair to as many people as possible.  Should it have up-front charges, flat charges, charges based on the value of funds under management, or any other type of charging structure you can think of?

I think I’ve got the answer to the charging structure that should apply to the new national scheme of personal accounts; it should be exactly the same as the structure enshrined in our legislation for Stakeholder Pensions.  Maybe not at the same high level of 1%, politicians seem to be in agreement that that is a bit on the high side and something around a third of that level may be more acceptable to people, but the structure should be the same.

If personal accounts do not use exactly the same charging structure as Stakeholder Pensions then I think we should ask why not.  If they do use the same structure it won’t take long before people work out that it will take forever and a day to get the numbers to stack up and everybody will at last see why it’s not a product solution we need to fix our self-inflicted pension crisis, but some serious changes to the structural problems which our private sector pensions have to cope with.

1 May 2008

Source: Department for Work and Pensions - Personal accounts: a new way to save, Regulatory Impact Assessment, December 2006.

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