Personal Accounts: Model Choice and Charges

The exact design of the personal account is still under review. At the time of writing it was expected to include the following three key areas.

• Single centralised Model with a clearing house, administrator, fund manager and separate division to administer access to funds.
  
  
• Investment will be via passive default, probably ethical and religious alternatives and possibly branded funds.
  
  
• Charges are likely to be 0.5% amc falling to 0.3% although the Personal Accounts Delivery Authority (PADA)launched its charging structure consultation: Building personal accounts: choosing a charging structure on 29th January 2008

The delivery authority is seeking views from a wide range of stakeholders and the general public, to inform its recommendation on the charging structure. This is the first of several consultations that are planned and underlines the delivery authority’s commitment to be an open and consultative organisation.

The consultation covers the charging structure of the scheme, not the level of charges. Charge levels will depend on the final design, costs and revenues which will not be known for some time.

There are a number of ways that charges could be deducted including:

• Annual management charge (AMC) - Members pay a fixed proportion of their funds under management each year.
  
  
• Contribution charge - Members pay a fixed proportion of each contribution into personal accounts.
  
  
• Joining charge - Members pay a one-off, upfront fee on joining the scheme. A joining fee would have to be levied in combination with another charging structure.
  
  
• A combination of a lower contribution charge with an AMC.
  

Different charging structures favour different potential members depending on their savings patterns, so the delivery authority will need to balance the interests of those saving in personal accounts. Annual management charges favour those who save later in life, for example, and contribution charges are best for members with a full savings history, some breaks in saving or who save earlier in life.

The charging structure also needs to ensure that the scheme is sustainable and maximises the member’s retirement income.

The delivery authority would like to receive views on how the charging structure should be evaluated, and on how the options compare. Comments are also sought on whether there are any particular activities, such as excessive switching between funds that should incur additional charges.

Launching the consultation the chief executive of the personal accounts delivery authority, Tim Jones, said:

"It is important that personal account charges are proportionate, clear and fair. If they aren’t, many individuals will not save for their retirement and, when they retire, they will undoubtedly be worse off. There is no silver bullet. No single charging structure or combination of structures offers a perfect solution.

"I would encourage everyone who has an interest in the long-term future of pensions in the UK to give us their views. We are particularly keen for all respondents to give us evidence to support their comments. Without supporting evidence it will be difficult for us to give the appropriate weight to their position."

The deliver authority’s initial work on charges has been informed by research on public attitudes towards management charges and financial modelling. The research on public attitudes will be published shortly. For reasons of commercial confidentiality the financial modelling will not be released.

The consultation will run until 22 April 2008. Stakeholders and members of the public can respond either by e-mail to  charging.padeliveryauthority@dwp.gsi.gov.uk

or by post to : Consultation co-ordinator, personal accounts delivery authority, New Court, Room 567, 48 Carey Street, London WC2A 2LS.

The delivery authority will publish its response to the charges consultation by 15 July 2008 and we will summarise the results on this site. It is planned to launch two further formal consultations - one will look at fund structures and investment choice and the other will look at the scheme’s rules.