Charges not the only barrier to the success of personal accounts

The decision by the Personal Accounts Delivery Authority (PADA) to consult widely on the structure of charges for personal accounts is to be welcomed. The Pensions Commission, in its strategic review of pensions, took the view that very low charges are necessary to encourage millions more to save for a private pension. The Commission pushed strongly for a target annual management charge of 0.3%.

Most industry experts believe this is unrealistic given the target market and expected profile of contributions. A 0.3% charge is only achievable through heavy government subsidy. This would be unfair to both the pensions industry and taxpayers and the government has stated the scheme must be self-financing.

PADA has acknowledged that no charging structure
will offer a perfect solution, but as far as possible,
charges should be clear, fair and proportionate. This
suggests that PADA has not ruled out allocation or flat
member charges. Administration of personal accounts
will involve processing huge numbers of weekly/monthly payments, of only a few pounds.

Whatever the eventual level, or shape, of personal account charges, the scheme must offer value for money to savers. Equally, it must be commercially viable with sufficient resources to enable administrators to deliver high standards of service. It must be remembered that these consumers will be generally unsophisticated investors, with a low appreciation of pensions and little trust in the government to handle their savings. This is a one time opportunity for the government to make personal accounts a success.

Employee behaviour on financial issues
Research from the US, and at home, reveals large numbers of employees choose not to voluntarily join their company scheme. In doing so, they have effectively ‘lost’ hundreds of pounds each year which could be invested for them for retirement.

The behaviour of employees in deciding whether or not to save for a pension is not driven by the level of product charges. Over the past year, AXA has worked with Professor Shlomo Benartzi at UCLA to gain insight into his research of the psychological barriers people have to saving for retirement. His findings are extremely informative in understanding the objections to overcome. In summary, the issues are:

  • Inertia – a feeling of disinterest and disengagement
    about pensions
  • A preference for immediate gratification – people
    spend money on short-term perceived needs. They
    lack the self control to save for longer-term goals
  • Loss aversion – the ‘loss’ of immediate income
    directed to pensions is felt more than the gain of
    saving to boost retirement income
  • Peer pressure – people are influenced by the herd
    instinct. If others are not saving, why should I.
  • Over confidence – A misplaced faith that they are
    saving enough or something will turn-up to solve
    their problem

    These are the real challenges facing the success of personal accounts and indeed other company schemes. Fortunately, our work with Professor Benartzi has identified solutions to overcome these psychological barriers.

    A final point, the government must change its policy regarding means testing of state benefits. Workers must be confident that every pound saved will increase income in retirement.

    Contact: Jo Cann, Marketing Director Corporate Benefits AXA Life