The National Pension Savings Scheme of personal accounts (PAs) was born out of Adair Turner’s Pension Commission Report of 2005. Among proposals to raise the state pension age to 67 and re-introduce the link to earnings was the notion of creating a broad-based savings scheme that would encourage more people to save for their retirement.

 

Sound familiar? Yet while the Department of Work and Pensions (DWP) resolutely insists this is not stakeholder mark II there are many critics who believe PAs share many of the faults of their underappreciated forebear. Tom McPhail, head of pensions research at the independent financial adviser Hargreaves Lansdown, speaks for many in the financial services industry when he questions just how beneficial the new scheme will for low-income savers. For those on means-tested benefits, he argues, “it could be a potential disaster and the government is in denial over this”.

 

Unsurprisingly, a spokesperson for the DWP denies this: “Under reform, someone with a good working or caring history can expect £145 (€213) in state pension. This already takes them out of pension credit and provides a solid platform for private saving. The large majority can expect to benefit from saving in personal accounts or an equivalent exempt scheme.”

 

But for Chris Grayling, the Conservative party’s Shadow Secretary of State for Work and Pensions, it is critical the new scheme works - and works effectively. “We have already had stakeholder pensions, which flopped,” he told IPE. “We have a major crisis of confidence in our pensions system where many now believe there is no point saving for retirement. We can’t afford to get it wrong again. This scheme has to work.”

 

While the truth will only be known on implementation in 2012, the genesis of the new scheme stems from the government’s seemingly paradoxical aim to “create a National Pension Savings Scheme (NPSS) into which people will be automatically enrolled but with the right to opt-out”. What that means in practice is that the burden will fall upon the employer: under the cover of the NPSS, the government has introduced an element of compulsion.

 

Yet a central plank of the new provision is that it must not damage existing schemes, and as such employers with good levels of cover are allowed to opt out - a process that many believe is itself fraught with danger.

 

“One of the key issues,” adds Andrew Tully, technical marketing manager at Standard Life, “is how they deal with employees with good pension schemes at the moment. There needs to be a similar type of scheme with the same contribution levels,” he says.

 

“In many cases existing workplace provision will offer better contribution rates than those proposed for PAs. It is an issue that has not been fully addressed,” warns John Wilson, head of research at HSBC Actuaries and Consultants. He is concerned about  Myners: chairs new body

 

 

the possibility of employers “levelling down” when PAs are introduced.

 

There is an additional danger that the new scheme merely recycles existing funds, shuffling money from one plan to another without encouraging more money to save for retirement.

 

Stephen Haddrill, the director general of the ABI argued recently that the forecasts that only £6 in every £10 of saving in personal accounts will be new saving- which means a minimum of 40%of the new system will use savings that would have happened anyway - is “a miserable target for the government to set for itself”.

 

The Pensions Act 2007 received Royal Assent at the end of July and, as Michelle Lewis, senior policy adviser at the NAPF, is right to point out, there are still five years before PAs are implemented. Fundamental to the success of the new scheme is the formation of the new Delivery Authority, which as the name suggests, will oversee its management. Headed by old industry hand and government favourite Paul Myners - former chairman of Gartmore and author of the 2000 Myners Report  on UK institutional investment - the new body is charged with drilling down into the detail. Which is what worries some people.

 

“The government has passed an awful lot of the detail on to the Delivery Authority,” notes Jeremy Ward, head of pensions marketing at Friends Provident, “One big area of uncertainty is just how they plan to collect premiums.”

 

His concerns are simple: “The last white paper left a lot of the details to be clarified, particularly concerning two difficult and potentially expensive areas - premium collection and reconciliation. How do you do it? They seem to have rejected PAYE schemes and there are always huge problems with using direct debit.”

 

Details aside, Ward also raises what threatens to be the biggest obstacle to the new scheme: the fact auto-enrolment from contract-based schemes, including group personal pensions, is prohibited by the EU Distance Market Directive.

 

The DWP says it is looking at the issue: “We are keen to understand the effectiveness of different joining techniques, the relative roles of employers and providers, and the cost they incur under different governance arrangements. And we are working closely with them to understand this.”

 

Indeed, despite the many industry concerns, Lewis insists the NAPF is broadly in favour of the new scheme. “Adair  Turner did a lot of the groundwork in building consensus, which was key to getting to this stage. But from our point of view while there are some issues that need to be worked through the new personal accounts are the right approach.”

 

Tom McPhail believes that while there are several practical problems yet to be resolved, conceptually the new personal accounts could provide a major boost to the industry. “I see a cultural shift occurring in 2012,” he says, “which could be the enduring legacy of personal accounts. The fact that everyone needs a pension will become accepted as part of the overall social consciousness, which means selling the message you have to save for your pension will be much easier. It represents a tremendous opportunity for the pensions industry.”

 

 

Timeline for NPSS

 

■ 2002, the government announces the establishment of an independent pensions Commission,headed by Adair Turner

 

■ 2005, the Turner Report was published. it recommended the creation of the npss, a raise in the state pension age to 67 and a restoration of the link to earnings

 

■ 25 May 2006, publication of the pensions reform white paper, security in Retirement: Towards a new pensions system

 

■ 29 november 2006, publication of the pensions Bill, which provides for the personal accounts Delivery Authority to be established

 

■ 12 December 2006, the government publishes its White paper, personal Accounts: A new Way to save

 

■ 29 March 2007, the Work and pensions select Committee publishes its report on personal accounts

 

■ 14 June 2007, the government publishes its response to the consultation on the White paper, personal Accounts: a new way to save, and its response to the Work and pensions select Committee report

 

■  27 July 2007, the pensions bill receives Royal Assent and becomes the pensions Act 2007

 

■ 1 August 2007, paul Myners appointed chair of the personal Accounts Delivery Authority

 

 

Personal accounts: the details

Personal accounts will extend the benefits of an occupational pension - including an employer contribution and tax relief - to millions of employees who currently do not have access to a good workplace pension. it will offer low charges to allow employees to keep more of their savings. Up to 10 million people will be automatically enrolled in the scheme from 2012. employees will contribute a minimum of 4% of their earnings (between approximately £5,000 and £33,500) a year, matched by a minimum 3% employer contribution and around 1% in the form of normal tax relief from the government. employer contributions will be phased in possibly over three years at a rate of 1% each year - this has yet to be determined.

 

Alongside this, the government says it is committed to providing “a solid foundation on which people can save” and to achieve this it intends to reform state pensions “so that they are simpler and more generous”. one of the key changes will see a rise in the state pension age to 67 for both men and women by 2036.

 

‘There is a danger that the new scheme merely recycles existing funds, shuffling money from one plan to another without encouraging more money to save for retirement’