E-based personal accounts need member education

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  • E-based personal accounts need member education

UK - The pensions and investment industry has warned a 'self-service' e-approach to personal account members investment decisions risks "underestimating" the challenges involved in educating consumers.

In response to a consultation entitled 'Building personal accounts: securing a retirement income' published by the Personal Accounts Delivery Authority (PADA) in December 2008, a number of participants said more financial education, communication and advice was needed for members, if PADA went ahead with plans to use the latest technology to cut costs. (See earlier IPE article: PADA highlights issues for non-UK savers)

The Investment Management Association (IMA) warned it believes "a ‘self service' platform may not be sufficient to help consumers make the appropriate decisions to ensure they have a sustainable retirement income".

The consultation paper - which closed on 4 March 2009 - pointed out the difficulty of reaching conclusions about member confidence in online purchases in the future, but the IMA suggested, "taken together with other evidence about lack of product knowledge, this implies that there is insufficient evidence to provide PADA or the Trustee Corporation with any certainty that consumers will be able to make good decisions on decumulation in the early years of the scheme".  
It added: "We do not believe that smart communications technology will be sufficient in and of itself to provide consumers with the tools to make correct decisions. Many individuals should be taking some form of advice about their retirement income options, and mechanisms should be developed within the personal accounts platform both to encourage and monitor behaviour."

Possible solutions put forward by the organisation include a page or flagged statement, for example on the website, which asks "whether an individual has taken any form of guidance or advice before they proceed to either a default, focused choice or OMO route", and also the potential role of a default annuity option. 

Richard Saunders, chief executive of IMA, said: "While we understand PADA's concerns [about a default annuity] there is still a need for a wider debate about the role of the default option.  A ‘self-service' approach runs real risks of sub-optimal outcomes for some, and we consider a true default option may be the better way forward."

Xafinity Paymaster agreed member awareness and cost-effective administration practices "are integral to the project's success", and claimed "an in-depth communications exercise is essential to educate the public".

It argued with improved general awareness "members of the personal accounts scheme and other DC schemes are more likely to feel comfortable using the internet and other low-cost channels to access and manage their personal finances".

Xafinity Paymaster, which could be one of the contenders for the administration contract, also joined the IMA in calling for a default mechanism for members once they reach the age of 75, as it claimed a system that "pays out a lump sum or puts members into a default annuity product means less administration and thus less cost managing members at that time".                                          

Clare Ward, director of Xafinity Paymaster, said: "It will be much easier to achieve PADA's objective of making the personal accounts scheme an e-business, if there is greater public awareness of retirement income options. With greater awareness, members will be more comfortable using low-cost e-channels."

Meanwhile, the Pension Policy Institute (PPI) also focused on plans to offer members lifetime annuities with transfers out for those wanting income drawdown and the choice of the Open Market Option (OMO), or a 'focused panel' of providers for deciding on an annuity purchase.

Overall, the organisation suggested the proposals "strike a reasonable balance" in allowing members to shop around for annuities, but said "one or two specific issues will need careful consideration" - in particular the "perceived fairness" of plans for transfers and drawdown, and the level of "potential detriment" if impaired life annuitants use the 'focused choice' process.

The PPI said while it "broadly agrees" a lifetime annuity is "probably the best way" for scheme members to secure a retirement income it warned this approach may have to be reviewed in 2017 once more data is available, or if a large number of members start building up substantial pension pots as income drawdown is generally used with pension funds of at least £50-100,000.

PADA suggested offering transfers for those wishing to take drawdown, but the PPI warned not all members will have an existing pension product which will both permit a transfer from personal accounts and allow income drawdown, for example those with a pre-existing defined benefit (DB) pension scheme.

In addition, the PPI argued further research would need to be conducted to ensure members using the 'focused' panel of providers to secure an annuity instead of the OMO are not losing out on a "significant' amount of pension income, particularly for those with ill-health or short life expectancy, and who may receive more with a specialised annuity not offered by the panel.

The think tank also raised some concerns over plans to use online services to distribute information on retirement options as it warned internet usage "is likely to vary by age" and while some people are happy completing short-term financial decisions online "they feel more hesitant about making long-term decisions like pensions without actually talking to someone face-to-face about their options".

If you have any comments you would like to add to this or any other story, contact Nyree Stewart on + 44 (0)20 7261 4618 or email

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