PENSIONS: When reality bites
Spiralling costs are a wake-up call for Government's ill-advised pension plans
It looks like it's not just the Olympics that are going over budget in 2012. Apparently the cost of establishing the national scheme of personal accounts that 10 million people look likely to get auto- enrolled into in 2012 is beginning to spiral.
The Personal Accounts Delivery Authority has been put in place to oversee the development of this new occupational pension scheme. It will be the biggest occupational pension scheme in the world and will take a fair bit of setting up and running.
The whole idea of it is that it will be done so cheaply and efficiently that it will outperform all existing pension schemes, thus proving once and for all the government can run pension schemes better and cheaper than private industry can.
Having pulled that trick off, the scheme will be able to give real value for money for savers and everything thereafter will be just tickety-boo.
That's the plan, anyway. But reality seems to be kicking in early on in the dream.
The bottom line now appears to be that the cost of setting up the scheme looks likely to top £2bn, or four times the original budget of £500m. Part of this cost is due to the fact that something like 100 consultants are currently working on the project and being paid a daily rate of between £800 and £2,500.
I find the whole thing really depressing. If these costs get out of hand in the building and running of this massive and unique pension scheme who will end up footing the bill? It ought to be the members of the scheme (if it ever gets any that is); that's the way it works with other private sector schemes.
The costs of establishing and running schemes, particularly with regard to variables like take-up and persistency, cannot be taken lightly. That has to be doubly the case with a titanic national scheme like this designed for 10 million to be swept in, but with the understanding that over two million will immediately jump ship.
That's a problem really with this whole concept of "voluntary compulsion" and I wonder if those with the task of building this massive scheme from scratch have just started to work that out? It is odd indeed to be building a scheme that's only going to be suitable for some of the people being auto-enrolled into it and, therefore, with many expected to extricate themselves if they can work out how to do it. That is an administrative nightmare if nothing else.
It is possible that one of the measures put in place in the recent Budget may help cut running costs of occupational pension schemes like the national scheme of personal accounts. The extension of the ability for scheme managers to allow trivial commutation of small pension pots should make things easier and cheaper for occupational schemes.
But by not extending such rights to personal pensions it drives a horse and coaches through the idea of our having one set of pension rules for all types of scheme. How worrying that we are going back so quickly to the bad old days of multiple pension regimes.
Some commentators are concerned that UK taxpayers could end up shelling out their hard-earned cash to get this scheme launched. Let us hope not. Quite apart from anything else, that would surely be unfair competition for existing commercially run pension schemes.
But even putting that worry aside, there's something else I think we should be questioning here. If it really is going to cost billions to build this untried and clumsy pension scheme, wouldn't we all be better off if that money could be channelled instead into providing a decent basic state pension entitlement for everyone, thus providing a solid bedrock for private pension saving? That would cut the costs of distributing and running existing pension schemes considerably.
The argument against providing a subsistence level of state pension entitlement, and thereby making pension saving suitable for all, was that it would cost billions of pounds to do so. But if the untried alternative is to cost billions anyway, what's the issue?
Has the Pension Bill debate used up all our precious time? Is it now too late in the day to stop this runaway train?
First published in Money Marketing, 27 March 2008