Personal accounts could lead to mis-selling, claims think tank

UK - The introduction of UK personal accounts could increase the risk of the UK population being missold pensions unless key changes are made to help deliver great returns and flexibility at retirement, a right-wing UK think tank has claimed.

A 97-page report published by the Centre for Policy Studies, which publicly declares its support for the UK opposition party the Conservatives, today arguing Personal Accounts (PAs) should be replaced with the Flexible Retirement Savings Account (FRSA) because the current terms of the PA product - being introduced in 2012 - are inflexible and could lead some lower-paid individuals to believe they have been missold a pension as it might affect any entitlement to means-tested Pension Credit.

The argument made by author Michael Jordan, in his paper Don't let this crisis go to waste, is PAs invite "a major mis-selling scandal through its interaction with means-testing, and lacks the structural flexibility to accommodate the needs of future pensioners", even though personal accounts will not technically be sold or missold to policyholders as members will be auto-enrolled the government-sponsored scheme unless they choose to opt out.

Full details of how personal accounts will work and how they could be invested have yet to be published by the Personal Accounts Delivery Authority (PADA). However, the CPS report argued it would be better to introduce FRSAs - similar in concept to the Lifetime Individual Savings Account (LISA) proposed by the Conservative Party in 2004 - which would allow individuals to access assets prior to retirement if necessary, much like a regular savings plan, with matching contributions and allowing people to use monies as they saw fit, rather than be required to buy a lifetime annuity.

The document appears to be highly supportive of the UK retail pensions regime, as it recommends policyholders should be allowed to invest assets as they please, and seek independent financial advice through advisers (IFAs) if they prefer, while the default funds could be "three large" lifestyled with-profits funds - a concept which has seen huge criticism in the UK over recent years for appearing to guarantee returns when they are in fact subject to the ravages of the equities markets and could lose rather than earn money.

Instead of the PA, the CPS recommended the UK's State Second Pensions (S2p) accrual be scrapped and "disappear…in time" but national insurance assets - worth £66.3bn of the £75bn raised every year - instead be used to help finance a "substantially increased" state pension, payable 10 years after the State Pension Age to facilitate people's financing when they enter "senior citizenship" and lift them above the Guarantee Credit limit of the means-testing system.

Jordan stated in his paper that "proposals are designed to reform the PA so that the risk of mis-selling is removed while also greatly increasing the income of those in retirement - particularly the low paid".

At the same time, he suggested individuals should be allowed to invest as they like at retirement and potentially buy a 10-year annuity at retirement with the pensions top-up fund (FRSA), while the remainder of any assets could go to any named individual at death, free of inheritance tax, providing the monies go into another retirement account.

Under his calculations, Jordan argued a 40-year old on the national minimum wage who saves until reaching the state pensions age (SPA) could amass assets of over £43,000 could receive a weekly income of £93 through a 10-year annuity, as the corresponding lifetime annuity under the PA would be £2 a week, assuming a real return of 2.5% on investments.

He also claimed the maximum sum anyone should be required to contribute should be 7% of gross earnings - 3% from employer, 3% from employee and 1% tax rebate - , but with a potential contributions top-up of up to 3% for anyone on an income of less than £10,900, ie the minimum wage threshold.

Assistance in the researching of this proposal was given by Ken Davy, chairman of UK IFA network SimplyBiz, Andrew Dennis, a former life and pensions executive, and Howard Flight, former shadow chief secretary to the Treasury, alongside contributions from Kevin Wedbroom, senior consultant at Hewitt Associates, Mark Younger, former partner at Accenture, Jeremy Goford, former president of the Institute of Actuaries and Carol Bell, who is a former head of European equity research at JP Morgan and former colleague of the report's author Michael Jordan.

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