Personal Accounts, compulsion and mandatory retirement ages – all in day’s work

Sean Browes

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I’ve been doing some catching up on “pensions news”.

The latest annual report from the Office for National Statistics (ONS) suggests an increasing number of people contributing to work placed pension schemes. Interesting, I’d like to see how the 2009 figures look but encouraging nonetheless.

Less positive, but not surprising, is the trend towards DC provision with lower employer contribution levels (compared to DB provision).

Some other industry headlines currently:

  • Personal Accounts – will the Tories scrap them? For how long might auto enrolment be delayed?
  • Default retirement ages and State Retirement Age – is there a need for a default retirement age? To what age and how quickly should the State Retirement Age be increased?
  • 30% of trust-based defined contribution schemes have breached retirement disclosure regulations according to the Pensions Regulator (“Professional Pensions – DC Schemes breach disclosure rules”)
  • Lindsay Tomlinson (NAPF chairman) has countered media claims that the NAPF were “failing to represent the priorities of its pension fund members by not doing more on corporate governance” claiming “we have a long track record of improving standards. Last month we launched a pension quality mark designed to raise standards in defined contribution provision and to ensure that people are saving enough.” (“Professional Pensions – Tomlinson hits back at media reports”)

(you can decide yourself if the last two points are either contradictory or that the former demonstrates the need for the latter!).

Here’s my proposed solution that addresses all these points:

  • If DC is to be the way forward, we have existing contract based products in the marketplace – why re-invent the wheel with Personal Accounts? (especially as there is some lack of enthusiasm to administer them). Stop press: apparently the Personal Accounts Delivery Authority (PADA) is developing “a new system to administer personal accounts”. Business Delivery Director Simon Richards said: “[T]his means that rather than buying a new IT system, PADA will use the technology and business processes of existing firms.” … so why not go the whole hog?
  • Procrastination is the thief of time or, in this case, future financial security – lack of compulsion to contribute left Stakeholder schemes dead in the water (notwithstanding they were a cheap and cheerful replacement for closed DB arrangements). Let’s just bite the bullet and impose mandatory contributions from outset. If there are concerns this will create a cliff edge increase in employer/employee costs, put in place some transitional tax reliefs.
  • Scrap any idea for a default retirement age including a default State Retirement Age (radical huh?) – the only test should be can an individual do the job? Does the job legitimately exist? Do they want to do the job? I accept that there appears to be some reluctance amongst employers to embrace this idea but I suspect this is just a mindset – I have yet to see a reasonable explanation as to why a default retirement age is felt necessary.Individuals should be free to plan their retirement and look holistically at all sources of revenue – pensions, savings, equity release, part time (full time) working, state benefits whatever. They should be free to mix and match to create the required level of income at any point in time (generally, more pension, less working the older you get?). This should include the option to draw State benefits at any age, appropriately adjusted to reflect the length benefits will be paid and/or to take part of any State entitlement and defer the rest – i.e. fully flexible retirement for State benefits!

    By the way, also scrap all means tested benefits and knock on the head once and for all the possibility that individuals might pay into a scheme ‘for nothing’.

  • Finally, let’s tie up the NAPF concept of kite marked DC schemes with using existing contract based arrangements as an alternative to Personal Accounts.Rather than focus on the employer, for contract based arrangements, focus on the provider. Review the provider communication, web based access, flexibility, fund choice, charges, performance etc. and kite mark that arrangement.

    That way employers (and admittedly I’m looking at this with an SME bias who don’t have self administered DC arrangements) can pull a product off the shelf to use to facilitate compliance with compulsion. If they have an existing contract based arrangement in place, it would be down to the provider to make sure that arrangement was able to be kite marked?

    As for the contribution levels, di-minimis would be compulsion levels, thereafter a table to indicate better and best contribution rates but, to echo Neil Copeland’s comments (“Blog post – Paving the road to hell”), there shouldn’t be a ‘poor’ rate – beyond the compulsion rates, it will be (especially in the SME sector) a question of affordability but any contribution must be better than no contribution?

There, problems solved and it’s still only 10.30 in the morning, not sure what to do for the rest of the day.

Sean Browes

Post by Sean Browes

Sean has over 20 years experience in the pensions industry and is a specialist in technical administrative aspects, data issues and the development of software tools.