Personal accounts to fail – Punter Southall

Personal accounts will be a failure because most employers will retain their existing scheme, making an annual charge of less than 1 per cent impossible, says Punter Southall Financial Management.

Publishing its DC Pensions In The Workplace survey, the firm says around 80 per cent of employers intend to keep their existing pension scheme in place with only 2 per cent planning on offering a pure personal accounts pension scheme. It argues that such a take up rate far below the economy of scale needed to deliver the proposed low costs. Such a scenario would make management fees for personal accounts as high as 1 per cent, far more expensive than most current DC pension schemes, it says.

The survey interviewed HR directors, finance directors, and pension managers from over 300 companies representing around one million employees across a wide range of business sectors, including over 20 FTSE 100 employers.

The Personal Accounts Delivery Authority has rejected the findings of the report, and says it never expected huge numbers of companies with existing provision to switch to its offering. It says it is still on course to deliver at a charge of 0.5 per cent a year, or equivalent.

The report also found that only 5 per cent of companies now have a final salary scheme that is open to new entrants. There has also been a shift from final salary and trust-based schemes to contract based arrangements, resulting in a wholesale transfer of risk from the company and trustees to the members.

It also found that whilst 48 per cent of pension schemes have been reviewed within the last 12 months, 14 per cent 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 per cent of schemes and only 10 per cent of employers have canvassed the opinions of their staff to understand whether the benefits that are available are valued or even appropriate.

Salary sacrifice has been rejected or not even considered by 57 per cent of companies, while 57 per cent of employers do not re-promote the pension plan to non joiners. Yet 60 per cent 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 says: “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 per cent 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 per cent and a passive fund tracking the FTSE 100 has lost 31.3 per cent.”

A Pada spokeswoman says: “We don’t expect huge numbers of companies with existing provision to use us across their workforce – we are designed to complement existing provision. A major part of our customer base will come from employers without existing provision. However, the scheme may also be useful for certain groups of workers within larger firms – for example those on short-term contracts or in sectors where there is high turnover of staff. We envisage that the scheme will deliver a good quality pension with a low charge – 0.5 per cent AMC or equivalent – and help millions save for their retirement.”