As 2012 and personal accounts get ever closer, the debate continues over whether they will have any advantages over stakeholder pension schemes, or vice versa, says Sarah Coles
When the writers of Groundhog Day were looking for the quintessential annoying individual to pester Bill Murray on the day he was doomed to live over and over again, they picked a financial adviser selling life insurance. But they missed a trick - they should have had him flogging pensions. Most people would go to any lengths to avoid facing the complexity and expense involved in pensions - so the government has had to step in.
It has already had one go, by establishing stakeholder pensions and forcing employers that had previously dodged the issue of pensions provision to set one up. Its second attempt is the Pensions Act 2008, passed last November. Part of the Act will introduce personal accounts from 2012. The question is whether employers will flock to this new system of national accounts, or whether there is any mileage in sticking with stakeholder schemes.
Either way, under the new legislation, all UK staff will have to be automatically enrolled into an occupational pension plan of some sort, and must opt out if they want to leave. There will be mandatory contributions of 8% of qualifying earnings (4% from the employee, 3% from the employer and 1% via tax relief). So employers can continue to offer their existing schemes as long as these meet the minimum standards laid out in the Act.
This has raised the question of whether stakeholder schemes have any fundamental advantages over personal accounts. The final details of personal accounts have yet to be hammered out, but experts are predicting that, as with stakeholder plans, there will be a few simple investment options. Employees are likely to have a choice of investment funds, including social, environmental and ethical varieties, with an automatic default option. Steve Charlton, principal and leader of personal accounts consulting at Mercer, says: "This has not been decided yet, but thoughts around the consultation are that, for the new target market, it has to be easy, so there may be a default fund and a small range of funds."
Charges on personal accounts will eventually be lower than those on stakeholder plans. The stated long-term aim of personal accounts will be to have an annual fund management charge of about 0.3% a year of funds under management. This compares well with stakeholder plans, for which the legal charge is 1.5% for the first 10 years, then 1%, but many charge well below this. Paul Macro, senior defined contribution consultant at Watson Wyatt, says: "Stakeholder is effectively 1%. We will see personal accounts come in well below that."
But in the short term, personal accounts may be more expensive, says Charlton. "There has been a consultation on charging structures that may apply. No decision has been made, but the consultation found that if you have a single annual management charge, it may look a little high in the early years to recoup the costs of establishing the vehicle. If you had a joining fee or administration fee and an annual charge, it may look more palatable."
The new accounts are also expected to be easier to access than stakeholder plans. "There is only one provider, so if [employers] are not engaged with pensions, [they] will probably opt for the personal account vehicle," says Charlton.
But whatever employers choose, the changes will be an administrative challenge. They will have to alter payroll so staff are auto-enrolled, but have the freedom to opt out. If staff leave the plan, systems must be set up to re-enrol them every three years, again with the ability to opt out. "If employers just want to put in the legal minimum, there is little advantage in using a stakeholder or their own scheme over a personal account," says Macro.
Even if employers want to provide above the statutory minimum, they may find staff do not recognise the difference, says David Bird, a principal at Towers Perrin. ""People find it difficult to engage with the difference between a plan paying 10% and a personal account paying 8%. For them, it is a minor difference, so differentiation becomes a lot more blurred. Even if an employer's scheme is twice as good, can staff really tell?" Of course, employers will want to differentiate themselves in the recruitment market, and reward will be a vital part of that. But, as Bird says: "Unless employers offer a defined benefit scheme, I am not sure, in a world of auto-enrolment, that pensions is a compelling place to achieve this differentiation."
If you read nothing else, read this...
- The Pensions Act 2008 will bring auto enrolment, mandatory contributions as well as personal accounts in 2012.