Personal accounts will fail to hit critacal mass – Punter Southall

Personal Accounts will fail 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 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 per cent, far more expensive than most current DC pension schemes, it says.

The Personal Accounts Delivery Authority says it is not attempting to compete with existing schemes, and says it will still be able to achieve the economies of scale necessary to offer a low charge of 0.5 per cent a year, or equivalent, without mass levelling down.

The Punter Southall 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 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.

Damian Stancombe, principal and head of corporate DC at Punter Southall 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 12 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.”