Dangers of Personal Accounts

by Dr. Ros Altmann

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I believe the personal account reform programme is so dangerous and, unless means testing and risks to existing pension schemes are taken seriously, personal accounts will make things worse rather than better over the long term. The problem, as always, is the difference in time horizon between pensions contributions policy and pensions outcomes in practice.

Politicians will judge the success of personal accounts by how many people are putting money in. The real success, however, will only come if people actually get decent pensions OUT. But today's policy makers will be long gone by the time people know whether they did get much pension, or whether it was worth contributing at all (which for many it won't be).

I know we have a consensus around the personal accounts, but that is hardly a surprise. The benefits and opportunities for powerful groups are all up front, and the threats and risks for the ordinary citizen with no real voice are all later on!

Politicians will claim success if significant numbers of people are auto-enrolled into these accounts.

The Treasury will be happy because the personal accounts will save costs on means testing later.

The financial companies have spotted the huge potential pools of assets they will be able to charge fees on for many years, before anyone realises they didn't get much out!

Employers - especially the large companies who are mostly already contributing to pension schemes for their workers - are excited by the potential to cut contributions back to the recommended 3% minimum (which could well become the maximum if we don't address this leveling down risk). Of course they will say, now, that they don't intend to cut back, but the temptation is likely to prove enormous for many. also, by switching their employees to personal accounts, the employer also gets rid of any risks associated with either running or choosing a pension scheme for their staff.

By contrast, the member who is contributing has to hope that in several years or decades time, the money that has gone into their personal account will have performed well, the annuity or pension they buy at the end will be good value for them and that they won't suffer any penalty from means testing in their state pension. These are huge risks, but come later on, long after politicians are gone and financial companies earn good fees!

Maybe I'm too cynical, but all my prior work on pensions leads me to believe that personal accounts are more likely to make things worse, rather than better and that we must urgently reform the state pension system to have a hope of making this work. Even if we pay a universal state pension to everyone from age 75 (treating women fairly, not requiring annuity purchase, ending the national insurance myth and poverty for the elderly over that age) at least then at some point personal account pensions would be free of pension credit penalties for everyone.


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