Personal pension accounts – will they meet the pension needs of an ageing population?

The general consensus from the heavyweights in the world of pensions would have us believe that auto-enrolment and personal accounts will lead the UK out of the pensions mire with blasting trumpets and a marching band.

Suggestions published by the government in its White Paper, Personal Accounts: A new way to save, in December 2006, were formalised by the government in its response in June. Widespread agreement was then reached with rival political parties, the National Association of Pension Funds (NAPF), the TUC and others.

From 2012, people who are not members of a company pension scheme will be automatically enrolled into low-cost personal accounts, but they will have the choice to opt out. Employees will contribute 4% of their pay into the scheme, with employers paying in 3%, and the government contributing 1%.

Saving mentality

The minister for pensions reform, Mike O’Brien, pointed out in a recent interview with Personnel Today that nine million people currently in work make no contribution towards a pension. It is through a vehicle of “communication, communication, communication” that O’Brien believes the government will drive employees into saving for their retirement.

He has already promised to simplify the pensions system to ease the burden on employers, which – he insisted – will play a central role in the process.

O’Brien said that employers with pension schemes that had not been taken up by all staff would be encouraged to persuade reluctant employees to join.

“Employers will find that’s the easiest way to deal with the new regime,” he said.

“There will be a lot of information out there by 2012, through a combination of television and other media. It is likely the knowledge of employers and employees will be at a reasonable level,” he added.

Paul Myners, the new chairman of the Personal Accounts Delivery Authority (PADA), the body tasked with introducing personal accounts, said the scheme’s success would depend on employers and employees understanding it.

Speaking at the NAPF autumn conference last week, he said: “The scheme needs simple and straightforward messages. Keeping our focus on clear communications is essential, but challenging. PADA aims, with automatic enrolment, to strongly encourage people to save, while at the same time leaving them free to decide to opt out.”

A timely piece of research conducted by insurance provider Legal & General found that more than half of UK employees said they would choose to remain opted in to personal accounts when they are introduced in five years’ time. The survey of more than 33,000 people found that one-third would choose to opt out, while one in five remained confused.

Education programme

Adrian Boulding, wealth policy director at Legal & General, said the results were encouraging, and indicated a clear appetite for the scheme. But the survey also highlighted a need for an ongoing education programme, as a significant number of people answered ‘don’t know’.

“The government still has a job to do in informing people about how personal accounts work and how they will benefit individuals,” Boulding said. “Companies are gearing up for 2012, but the benefits of the scheme need to be communicated now if individuals are to be in the best position to make informed choices.”

Rachel Vahey, head of pensions development at insurer Aegon Scottish Equitable, warned that the government would have to guard against employers levelling down pension contributions and personal accounts threatening the existing market.

However, O’Brien reiterated that personal accounts would complement – rather than replace – existing pension provisions, and target low-to-moderate earners who did not have access to a company scheme.

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