Personal accounts charging structure splits industry
UK - The charging structure for personal accounts has split the pensions industry, with life insurers preferring a combined charge and other stakeholders favouring a single annual management charge (AMC).
Personal accounts are due to commence in 2012 and will cover all workers without other occupational retirement provision.
The number of account holders could rise to 10 million.
In its summary of consultation responses, the Personal Accounts Delivery Authority (PADA) said there was "no clear consensus view on the most appropriate charging structure" with the majority of respondents split between either an annual management charge (AMC) only structure, or a contribution charge combined wth an AMC.
However, it pointed out that "respondents who supported one of these options tended to oppose the other", with Tim Jones, chief executive of PADA, telling MPs on the Parliamentary Work & Pensions Select Committee, that "this is not one of those consultations that have come down in one place; it has come down into two places".
Respondents that favoured the AMC-only structure claimed it would be simple and transparent and encourage participation in the scheme, while supporters of the combined contribution charge and AMC - in particular life insurers - argued it would be the "most sustainable option" and provide flexibility to deal with a range of business risks.
PADA said the 47 responses to the consultation had increased the organisation's understanding of the effects of the different charging structures, and would be taken into account when providing its recommendation to the government later in the year.
But despite the split over the type of structure, PADA claimed all the respondents agreed the chosen system should be simple, with the charging structure covering a "core set of service" such as the management of the default fund, as a way of keeping costs low, with members paying additional charges for certain services.
As a result, PADA confirmed "building simplicity into the scheme will include designing a set of core services that will be covered by the headline charging structure, and seeking to limit those areas where additional charges may be required".
However, the consultation response pointed out that PADA would not factor in the cost of advice, as it would not provide any kind of financial advice, and highlighted the cost of fund switches and different fund management options, including ethical funds, would be included in the investment consultation scheduled for autumn 2008.
PADA admitted the charging structure consultation had given the organisation "several issues to consider" including the simplicity of personal accounts, how to evaluate the effect of the charging structure on the existing pensions market, and the "clarity and simplicity" of communications to scheme members.
Jones said: "Although there is no clear consensus about which charging structure would be best, there is agreement about the qualities the charging structure will need to help personal accounts succeed in its ultimate goal."
"Our job now is to consider the options and issues further, taking into account the responses we have received, before providing recommendations. Later this year, to the department for work and pensions," he added.
However, the life insurance industry appears to favour the combined option of a contribution charge and AMC, as Helen White, assistant director of retirement policy at the Association of Brtish Insurers (ABI), claimed combined charges would allow for "effective management of the significant set-up costs of personal acocunts".
She said: "Fairness and sustainability must be the basis for setting the charging structure for personal accounts. We favour a combined AMC and contribution charge, as this will not punish savers with dormant pension accounts, or those who have taken a contributions holiday."
Rachel Vahey, head of pensions development at AEGON, added it was "good to see PADA recognises the advantages of a combination charge which we believe is a more sustainable option".
She said the alternative of a flat annual charge would mean "higher up-front costs to taxpayers, more chance that personal accounts customers will face higher charges in future, and more chance that the scheme might have to go cap-in-hand to the Treasury at some point in the future".
Paul Myners, chairman of PADA, said: "The responses to this consultation show there is no easy answer. What is clear is that the charging structure will be a key design decision for the scheme."
"The choice of charging structure will have a direct effect on member outcomes. It will effect the viability and sustainability of the scheme and it may have an impact on participation in the scheme," he added.
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