UK - The Personal Accounts Delivery Authority has issued a consultation on the proposed charging structure for the new regime, but has rejected the idea of a 'flat fee'.

Tim Jones, chief executive of PADA, a non-departmental public body established to design and set-up the new system of personal accounts, revealed the options outlined in the consultation paper do not include a 'flat fee' structure as its effect on retirement incomes was too varied.

He said modelling by the PADA had revealed a single flat fee - where everybody would pay an equal share of the annual cost of the entire scheme - would lead to very high variations in retirement outcomes, which could include someone on a low income losing their entire savings pot to charges.

Instead the consultation paper, which closes on April 22 2008, puts forward four possible structures for the charges:

an annual management charge (AMC); a contribution charge, as a percentage of each contribution; a joining fee which could be a proportion of contributions or in conjunction with an AMC; or a structure which combines at least two of the different elements. 

But Jones warned although the PADA wants a charging structure that is "proportionate, clear and fair" he claimed "there is no silver bullet" solution, as one charging structure will work better for different people.

He said: "We need to create a recommendation for a structure which is clear, communicable and seen to be fair. If there was one clear way, we wouldn't need to consult on this. We're not omniscient, if we've missed anything we want people to tell us, and one of the questions we're asking is 'are there any alternative structures which might be suitable'?"

In addition, the organisation wants suggestions about whether there should be additional charges for certain services, for example extra investment choice such as shari'ah or ethical funds, and in what form these charges should take.

That said, the consultation does not focus on the level of charges as Jones pointed out that will depend on a number of factors including the final design of the scheme, costs and the membership take-up, although he revealed PADA's current modelling suggests initial membership will be around five and a half million people, which could increase to seven million within 10-15 years.

Instead, the PADA highlighted three key objectives for the charging structure - to achieve a viable funding solution; minimise scheme costs and minimise business risks - which will allow it to be sustainable over the long-term.

As a result, the body suggests an AMC combined with a contribution charge would be "best suited to deal with multiple risks" including reducing funding requirements, while a joining fee combined with an AMC would "deal well" with the effects of an increase in the number of non-contributing members.

Jones said: "It is important that personal accounts charges are proportionate, clear and fair. If they are not, many individuals will not save for their retirement and, when they retire, they will undoubtedly be worse off."

The PADA is expected to publish its response to the findings by July 15 2008, and the recommendations will then feed into the "scheme order" which will be part of the secondary legislation relating to the pension reforms, that will also include the scheme rules.

Two further consultations focusing on fund structures and investment choice, and the scheme's rules, are expected to be launched by PADA later in the year.

But insurer Aegon has criticised the PADA for failing to publish its financial modelling assumptions, as it claimed unknown factors such as whether opt-out rates will meet expectations, could mean initial charging assumptions are over-optimistic. 

Steven Cameron, head of business regulation at Aegon, warned: "Personal accounts are a big social experiment and the charging structure must be resilient to potentially major differences between experience and assumption. PADA needs to be transparent about its assumptions so we can have a proper debate on the shape and, in due course, the level of charges to avoid the risk of calling on tax payer subsidies in the future."

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