Personal Accounts: DWP Executive Summary
Section 3: What are personal accounts and how will they be delivered?

37. Personal accounts are intended to solve the problems of low portability and high charges. They will do this by operating as a large, multi-employer occupational pension scheme and extending the benefits of employer schemes to those currently without access to them.
38. The large scale of personal accounts means that the set-up costs can be spread over a longer period and recovered from higher funds under management, thus reducing the average charge. This large scale will allow personal accounts to achieve economies of scale similar to those of large occupational schemes. However, unlike many employer schemes, individuals will be able to keep their account as they change jobs and continue to make contributions.
39. The Government estimates that personal accounts could have between 6 and 10 million members with private pension saving of around £8 billion a year, of which approximately 60 per cent will be new saving.
40. Personal accounts are a major development in the UK pensions system and arriving at the right decision on how to deliver the scheme is vital. The May 2006 White Paper set out at a high-level those functions necessary for delivering any personal accounts system (illustrated in Figure 4):

    • automatic enrolment: individuals would automatically join the personal accounts scheme through their employer;
    • collection, reconciliation and central functions: a central clearing house would be responsible for collecting contributions through employers, handling employer queries, keeping records of contributions and ensuring that contributions are allocated to the right funds;
    • administration of accounts: the administrator would maintain the account for the individual, handle an individual’s queries and be responsible for giving them information about their account;
    • investment and fund management: the fund manager would invest contributions on behalf of the saver; and
    • accessing pensions savings: when a saver retires they would annuitise their savings through the current annuity market, giving them a regular income throughout their retirement.

    Figure 4: The structure of personal accounts

    
41. The May 2006 White Paper set out the broad consensus that this is the right overall structure for personal accounts. But it made clear that there were different views about how the model should be delivered. Two broad models, both based on primarily private sector delivery, had emerged:

    • the National Pension Savings Scheme (NPSS) model – as proposed by the Pensions Commission, personal accounts would be run by a single organisation – the NPSS. Day-to-day management and operations would be outsourced to private-sector administrators. All customers would deal with the NPSS and would receive consistent service standards. Savers would be able to make decisions about whether to opt out of the scheme, whether to contribute above the minimum and their preferred approach to investment; and
    • the provider model – some argued that personal accounts should be delivered through existing pension providers. Rather than being governed by an arm’s length organisation, consumers would choose a pension provider. Those who did not choose would be assigned to a provider.

    Evaluating the models

42. A number of variants of these two approaches have been proposed since the publication of the May 2006 White Paper. A thorough evaluation of the possible delivery models has been undertaken by government, working closely with industry, employers and their representatives, consumer groups and regulators. The detailed evaluation is set out in Chapter 2 and the accompanying Regulatory Impact Assessment.
43. As the full evaluation makes clear, all the operational models have advantages and disadvantages. At the heart of all the models is a choice of the appropriate form of competition: competition for the market or competition for the customer. With competition for the market, providers compete to win contracts for administration or fund investment. With competition for customers, branded providers compete to win more customers.
44. Our assessment is that competition for the market will be more effective in maximising coverage and delivering low charges for the target group. Our analysis has also shown the importance that people place on simplicity in pension design. This highlights the necessity of building a scheme that simplifies the decisions people need to take and focuses their decisions on the key area of investment. For the reasons explained in the following sections, we are proposing an NPSS approach for personal accounts but with a choice of funds for those who want it.

    Maximising coverage

45. Personal accounts are intended to serve a part of the market that has not previously had access to good-value pension savings. This is a diverse group of people – many of whom will value extra choice. However, there will also be many who feel uncomfortable when expected to make complicated, unstructured choices.
46. Evidence from DWP research suggests that savers, especially those earning less than £30,000 a year, prefer not making a choice of administrator, whether from a panel or the open market.²⁵ Less financially aware consumers expressed concerns about having to make a choice, which they considered daunting, and might put them off participating. The NPSS approach offers simplicity for these individuals (and employers) and as such, is likely to maximise participation levels.

    Minimising charges

47. There is unlikely to be a significant difference in approaches to fund management between the models. Both models will use the best expertise in investment to manage individuals’ funds. Low charges are critical to ensuring that people build up the maximum pension fund from their savings. A male median earner who started saving aged 25 in 2012 and saved for 43 years, could have around a 20 per cent smaller final pension fund if the level of charges was 1.5 per cent rather than 0.5 percent.²⁶
48. Higher levels of persistency are expected in the NPSS approach as it will not be based on firms competing to encourage people to switch. This, along with reduced marketing costs due to firms not competing for individual accounts, should drive down costs. As a result, the NPSS approach is expected to be 20 to 25 per cent cheaper than a system based on direct competition between firms for individuals. Like the Pensions Commission, we are confident that the scheme can achieve a radical reduction in pension charges even in the short term and we will give the personal accounts board a statutory duty to deliver low costs to its members. We estimate that the long-term costs for personal accounts will be in line with those set out by the Pensions Commission of around 0.3 per cent of funds under management or even lower.
49. Some of those proposing models with competition between branded providers have suggested that in the longer term these models would be cheaper as competition would drive down costs over time. There is little evidence that competition for customers will provide significant downwards pressure on charges. Recent falls in charges have been a result of regulation, not competition. Similarly, international evidence from other countries shows that the lowest-cost systems are those with a limited choice of provider and/or investments – for example the Thrift Savings Plan in the United States.

    Minimising delevery risk

50. Simplicity is key to building a successful scheme. It is what individuals say they want and it will help to minimise delivery risks. The NPSS approach to personal accounts offers a clear line of accountability and responsibility for the overall project. It minimises the number of points of contact for employees and employers, and minimises the number of links between providers – where problems can typically occur. In contrast, the provider-led model would involve multiple contracting partners with no one body in overall control.
51. The simplicity of the scheme can affect the level of consumer protection. The Financial Services Authority has pointed out²⁷ that the risk of aggressive competitive practices, which could be detrimental to consumers, is removed in the NPSS approach. Confidence among individuals that any system of personal accounts is run in a fair and transparent manner is necessary to encourage people to remain opted in to the scheme. International experience, for example the Swedish PPM system, shows that pension schemes on this scale can be implemented successfully.

    Investment choice in personal accounts

52. Evidence28 reveals a widespread lack of confidence among UK consumers in their ability to make decisions about financial products. In our target market, this is aggravated by low levels of financial capability.²⁹
53. Personal accounts, therefore, must be designed so that they work for this part of our target group. We need to structure the choice so that as many as possible feel confident making the right decisions for themselves and those that do not feel able to take decisions are not disadvantaged.
54. Those who want a simple approach to saving will only have to decide whether to remain in the scheme and how much to contribute:

    • There will be a default fund for this group.
    • It will be for the personal accounts delivery authority (see Section 7) to design an appropriate default fund that balances the need to maximise returns against the risk of individuals’ funds falling in value.
    • We anticipate that the default fund will need to invest in a wide range of assets to reduce the risks associated with the performance of specific assets.
    • The default fund is also likely to incorporate a degree of lifestyling³⁰ to reduce the risks around the time of accessing savings.

55. Whilst the majority will be content with this level of choice, research shows that some members of our target group will want additional options.³¹ This could be a choice of administrator, fund or both. Whilst some on higher incomes said they would like a choice of administrator, the price of delivering choice for this small group would be higher charges for all customers. Given that high income customers are already well served by private pensions, choice of administrator is not a priority for personal accounts.
56. Research suggests that there is a demand for additional fund choice.³² In particular, younger respondents say they want to have the choice to invest ethically³³ and it may also be the case that there will be demand for investment options that conform to religious beliefs.
57. We will, therefore, task the delivery authority and then the personal accounts board to design investment options that best meet the needs of members. This will include a default fund and we expect it to include other options such as social, environmental and ethical investments, and branded funds. The inclusion of extra fund choice for those that want it could provide competitive pressure on the main investment funds as well as promoting personal responsibility amongst this group by encouraging higher contributions. It will be important to structure the choice of investment so that it benefits those who want to make a choice, without making the scheme confusing, whilst ensuring that charges are fair between different groups of customers.
58. The delivery authority and the personal accounts board will design these options based on consultation with people in the target group. The role of the Government will be to set down the general objectives for personal accounts but not to be involved in specific investment decisions.
59. Clearly, the investment options will need to be able to evolve over time, and the personal accounts board will need to take account of the changing trends in financial markets to refine what is available and how choice is delivered.

    Governance

60. Personal accounts will be a defined contribution, occupational scheme. The personal accounts board will be responsible for oversight and prudent management of the scheme as a whole. It will ensure that the scheme operates smoothly within the framework set out by legislation, and according to the principles of good governance and accounting. It will ensure that funds are invested prudently and in the best interests of members. In particular, it will be responsible for ensuring that contractors carry out their functions efficiently and in accordance with obligations set by the statutory framework.
61. It is the Government’s expectation that the personal accounts regulatory regime will be based on the existing framework rather than adding to the regulatory landscape. Work to decide the allocation of regulatory roles will be taken forward alongside the deregulatory and institutional reviews, and in consultation with the appropriate bodies.

    25. Hall S, Pettigrew N and Harvey P, 2006, research by Ipsos MORI for DWP, Public attitudes to personal accounts: Report of a qualitative study, DWP Research Report No 370. 26
    26. In this analysis we assume that there is no relationship between annual management charges and the returns achieved by managers for investors. ‘Active’ fund managers usually charge much higher fees compared with ‘passive’ fund managers, but evidence to date suggests that both types of fund managers achieve a similar rate of return. Research on this area is ongoing.
    27. Security in retirement: towards a new pensions system, The Government’s White Paper on pension reform – Financial Services Authority response.
    28. Marketing Sciences (2006), Retirement Planning Monitor. Hall, Pettigrew and Harvey, 2006, Public attitudes to personal accounts: Report of a qualitative study, DWP Research Report No 370.
    29. Atkinson A, McKay S, Kempson E and Collard S, 2006, Levels of financial capability in the UK: Results of a baseline survey Financial Services Authority Consumer Research Report, 47.
    30. where members’ contributions are invested in riskier, higher return assets when they are young, and then in safer assets, such as gilts, as they get close to retirement.
    31. Hall, Pettigrew and Harvey, 2006, Public attitudes to personal accounts: Report of a qualitative study, DWP Research Report No 370.
    32. Malcolm K and Wilsdon T, 2006, Branded choice in personal accounts, CRA International
    33. Hall, Pettigrew and Harvey, 2006, Public attitudes to personal accounts: Report of a qualitative study, DWP Research Report No 370.