Personal accounts will fail, research shows

Personal accounts are likely to be a failure when they are introduced in 2012, according to a survey on the provision of employer sponsored defined contribution (DC) pensions conducted by Punter Southall Financial Management

The survey also revealed that around 80% of employers intend to keep their existing pension scheme in place, with only 2% planning to offer a pure personal accounts pension scheme. This take-up rate is far below the economies of scale needed to deliver the proposed low costs. Such a scenario would make management fees for personal accounts as high as 1%, far more expensive than most current DC pension schemes.

The study of over 300 companies, representing around one million employees across a wide range of business sectors, showed that only 5% of companies now have a final salary scheme which is open to new entrants.

Other key findings include:

  • While almost half (48%) of pension schemes have been reviewed within the last 12 months, worryingly 14% have not been reviewed in the past five years, if at all.
  • Less than one quarter of pension members invest outside of the default option in 68% of schemes.
  • Only 10% of employers have canvassed the opinions of their staff to understand whether the benefits that are available are valued or appropriate.
  • Salary sacrifice has been rejected or not even considered by 57% of companies.
  • More than half (57%) of employers do not re-promote the pension plan to non joiners, while 60% of respondents believe that employers have a responsibility towards their employees’ financial education.

Damian Stancombe, Principal and Head of Corporate DC at Punter Southall Financial Management comments:
“With only 5% of employers offering defined benefit pensions (DB) to new joiners, it is now clear that defined contribution (DC) is the favoured pension vehicle. But whilst it is fair to state that the provision of DC has improved in recent years, there is still much work to be done.

“The scale of education and involvement of members must improve substantially. For instance, how many workers realise that a 40 year old who begins to save 10% of his earnings into a pension could expect to receive 25% of his annual salary as an income in retirement, but had the same individual begun saving at 26, his retirement income could have more than doubled?

“Meanwhile relevant and quality investment options must be created that fulfil people’s needs and offer them security. Our survey shows that for most schemes, over 75% of members invest in the default investment option, which is often not an appropriate choice. Sadly this has been proven recently, as during the last past twelve months, the average fund in the balanced managed sector has dropped by 19.8% and a passive fund tracking the FTSE 100 has lost 31.3%.”