Personal accounts will be disastrous for pensions
by Dr. Ros Altmann
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So what is happening to the personal accounts programme?
Over the past few weeks, it seems that the original enthusiasm for personal accounts has plummeted. Indeed, the Tories have openly questioned the future of the programme, although they have not committed themselves to any particular policy stance if they are in power after the next election.
I certainly hope that the policy will be re-thought, because as currently proposed it is a potential disaster for pensions. Indeed, the policy has already probably damaged pension prospects.
The Conservatives are questioning several aspects of the personal accounts proposals. For example, they are seriously concerned about the interaction of pension savings with mass means-testing in the state pension system for the target group of low to moderate earners.
About time too! Personal accounts will not be a suitable investment for hundreds of thousands of workers who will be automatically enrolled into them and, for millions more, they will deliver little pension.
Against this background, the Tories are presumably concerned about potential future Government liability for automatically enrolling workers into a scheme that is organised by the state, without sufficient warning that they may not be suitable for them. The Conservatives may also be concerned about the possible risks entailed in any choice of default funds. If the funds perform poorly, will Government be blamed when people find they have no extra pension?
And then there are concerns that employers will face far more burdens than originally admitted, when having to automatically enrol all workers into a pension scheme that many will then opt out of, as well as having to cope with any promotion of the scheme. All employers already have to designate a stakeholder pension scheme for their workers and there are noises from the Opposition that they might prefer to use the existing private sector framework, rather than continuing with a nationally organised, state-sponsored scheme that might not actually deliver good pensions anyway.
The dangers of personal accounts are significant and have been woefully underestimated. A further example of this is the recent announcement – which so incensed the Tories – that the Government will delay implementation of the full personal accounts measures until beyond the next Parliament. The Personal Accounts Delivery Authority has finally recognised that the original plans may have been too ambitious. Therefore, the personal accounts will be rolled out gradually and employers will initially only have to put 1% of workers’ ‘band earnings’ into the scheme, then building up to the 3% level over time and the full implementation will not be before 2016.
On the one hand, this is a sensible precautionary measure, to allow a phasing in of the programme, so that any technical problems can be overcome before every single employer has entered the system. Avoiding major technological failures is of course vital. But on the other hand, some politicians have expressed concern that by delaying full contributions and full roll-out, the policy will fail to achieve its aim of helping lower earning workers to start building up a pension.
In my view, the latter concern is not the most important issue, because I am convinced that the personal accounts pension forecasts are based on assumptions that are too optimistic. Firstly, investment returns cannot be relied on to deliver the strong capital growth that is forecast. Secondly, no serious attention has been given to the decumulation aspects and the forecasts for annuity rates are not even coherent. Apart from the risks of Solvency II, it is clear that annuity rates will worsen over time, as more people have to convert their defined contribution pension savings into a pension income and as more final salary schemes scoop up the available volume of annuities and longevity risk.
If the forecasts turn out to be wrong, then the assumed pension income that workers will receive from personal accounts will not materialise. Politicians are only worried about people putting money in, but what really matters is what pension income they get out. A pension fund is not a pension! But, of course, today’s policymakers will be long gone, living on generous taxpayer-provided public sector pensions, before workers discover that they saved in a personal account that delivered them very little pension, or merely replaced means-tested benefits they would have received anyway.
I do still believe that personal accounts may never actually be introduced. The policy has far more dangers than has hitherto been acknowledged. In theory, the concept makes sense, but in practice it does not suit the UK environment. It is likely to encourage employers to sharply cut their pension contributions (average contributions even in defined contribution schemes are around 7% at the moment), it is not compatible with mass means-testing of pensioners by the state system and there will be no independent advice to ensure people can properly assess suitability and understand the investment options.
All in all, personal accounts are a potentially disastrous policy and, without radical change to other parts of our pension system, they should not be introduced. I think the Tories will increasingly realise this and, if they form the next Government, I would not be surprised to see a halt to personal accounts and a major reassessment of the whole private pension reform agenda.