Making sure that everyone has one, or at least everyone except the self-employed is automatically enrolled into one is the top priority for Mike O’Brien, who took over the mantle of minister for pensions reform from James Purnell last June.
Getting the Personal Accounts Delivery Authority (PADA) off the ground is top of O’Brien’s to-do list, and with the recent appointment of Tim Jones to the role of chief executive, together with the publication next month of Otto Thoresen’s preliminary report on generic advice, advisers can expect a clearer view to begin to emerge of the world they will be required to work in post 2012.
The fear of competition from an ultra-low cost option may not be as great as some in the private sector have been led to believe. A total annual management charge of 0.3 per cent, including fund management, is not an article of faith for the Department for Work and Pensions, even though that was what Adair Turner proposed in his final report. And what the global cost will be will to an extent depend on PADA rather than the DWP.
“In terms of the figure for administration we are looking at 0.3 to 0.5 per cent. As to a target AMC? You need to talk to PADA. They are going to be looking at how to sort out the details of their targets and investment profiles,” says O’Brien.
But whatever the fund management cost charges, personal accounts will not be cheaper than the cheapest trackers in Sipps, such as the 0.25 per cent Hargreaves Lansdown charges on its Vantage Sipp for the HSBC FTSE All Share tracker. Dealing with thousands of small payments from the challenging customers in the personal accounts target group makes 0 per cent admin unfeasible. But the fact cheaper options exist means that personal finance sections on national newspapers are unlikely to recommend a mass switch into the state system on grounds of cost.
The personal accounts project involves setting up what will effectively be the biggest default fund in the country. But key decisions about how that fund is constituted will be left to Jones and his team.
O’Brien is adamant the scheme is not there to compete with existing plans. “That 7m who are not saving are very difficult for the pensions industry to properly serve. Some parts of the industry are serving it, but primarily through niche markets and large employers. We are aiming at the small employers, the hairdresser down the road, the small garage around the corner with one or two employees.”
After last year’s battle of the blogs between Steve Bee and his predecessor, O’Brien is more than aware that this target group is the most likely to be hit by pension credit if they save.
“It will benefit most people. It is difficult to say to someone they can rely on pension credit if they are in their 20s or 30s and they are on low income. They are taking a punt on pension credits being there after various changes in government in 30 years time. The prudent person would say that I want something I own, that I have a right to, which safeguards my long term future,” says O’Brien.
Advisers setting up workplace schemes today want to know what an exempt scheme will look like in 2012, and an annual percentage contribution seems likely. “It is important that we have schemes that are focused on delivering a good quality pension but the exemption needs too be pretty much self certifying and the employer needs to know that by a very simple test he is able to know his scheme is one that is acceptable,” says O’Brien. “Therefore to mitigate against levelling down we will try and make sure that employers’ self certification is as simple as possible. This is likely to be tied to a certain percentage of salary.”
Asked whether salary sacrifice is one of the things the Government wants to keep post-2012, in light of the potential for National Insurance leakage if everyone does it, O’Brien’s response is measured. “That is something which something the industry will need to have a view on. We are talking to the industry about all these things and at the moment I won’t go any further than that.
O’Brien is adamant that personal accounts will not be burdened by advice requirements and Thoresen’s generic advice findings will plug the gap.
“These people will need basic advice about what they are doing, a letter setting out ‘ this is what you are getting into, these are the broad terms of it’, a website to consult or a telephone number perhaps if they want some more basic information,” he says.
There will be some people who need detailed financial advice and it may well be that they will need to go to IFAs. Otto Thoresen is likely to report on an interim basis in November and his final report is due in Easter,” says O’Brien. “What he says will be important to the way we structure personal accounts. But what I am convinced we cannot afford to do is burden the whole personal accounts system with detailed financial advisory mechanism that looks on an individual basis for every conceivable variable of the human condition. The cost of providing that would be substantial and it would not something that we could offer within the reasonable cost structure that we have set out for personal accounts.
So leaving aside personal accounts, what does O’Brien have in store for the growing defined contribution pension sector, in particular the currently light touch contract-based arena? “There has been a traditional view that DC pensions have less risk. But that risk it is not limited to corruption. It is more than that,” says O’Brien. “At the same time we are concerned we don’t introduce a new level of regulation.”
The pre-Budget report proposals for improving the operation of the open market option called for yet more consumer information, but have stopped short of the wholesale decoupling of the accumulation and decumulation phases that some had demanded from the Treasury’s year-long review of the issue.
O’Brien denies that another government-sponsored website, to be set up by the Pensions Advisory Service, and improved information to consumers is a wasted opportunity for real change. While his desire to force people into personal accounts is seen by some as draconian, when it comes to annuities, he is decidedly non-interventionist, and consequently there will be no decoupling of the accumulation and decumulation phases of saving.
“It is the case people could improve their annuity rate by as much as 30 per cent but what you are effectively trying to do is say that government should interfere in the market to force people to take actions to look at annuities other than the one that they have taken a view that they want to have,” says O’Brien.
“People have the right to make the wrong decision. It may sound an odd thing to say but governments have limits on the extent to which they have to force people to make decisions. We might prefer them to get that extra 30 per cent in terms of an annuity but the question is should we be in the business of forcing them down a particular route?” says O’Brien.
But given the fact that most people will not look at the Government’s new website, wouldn’t making the open market option the default position create a more efficient market place? O’Brien is not prepared to intervene in the market to such an extent to make it happen. “If you follow the logic of that argument you would effectively be saying that you have got to go for the provider which has the largest annuity,” says O’Brien. “The intervention in the market then is very considerable.”
O’Brien has a similar view about what should be done for the thousands of pension investors in zombie with-profits funds that have no chance of ever meeting their target returns. He does not accept that parallels should be drawn between mortgage endowments and pension endowments.
“We benefit from having a market which functions well. there are problems which arise in it from time to time,’ says O’Brien. “We try to encourage the market to sort out those problems. We have regulations if the market fails to sort out those problems. If a scandal starts to present itself the Government will then intervene but the Government should not intervene unless it needs to do so. Our aim is not to try to run the market for individuals, it is to ensure that the market can operate efficiently. People have the right to make bad choices if that is what they want to do.”
O’Brien is confident of a positive outcome in the battle with Brussels over auto enrolment and the way the distance marketing directive impacts group personal pensions.
“There are some difficulties, particularly in relation to auto enrolment, which we still have to talk through with the EU. The Pensions Bill will come out in December. We will have a view by then but whether there are still issues that remains to be seen. We have got fairly robust legal advice on this and I think we will be alright.”
He is equally hopeful of progress on the plight of those left to rely on the Financial Assistance Scheme. “Andrew Young, the Government Actuary, is expected to produce a further report in November. he has already indicated that he will be able to identify better use of the assets in failed schemes. The aim is to move the amount the pensioners will get to around 90 per cent of the core amount. One of the questions is whether we will reach that or get beyond it,” says O’Brien.
O’Brien is scathing about the way the Conservative Party is approaching pensions, accusing them of ‘fantasy finances’ when it comes to the FAS.
“The Tories came up with this idea there was lots of unused money in insurance and pension funds whereas the ABI pointed out that the amounts were limited and they belonged to someone already,” says O’Brien. “Andrew Young said he did not think there were anything like the amounts they said in these funds so it was a non starter as a solution. So in July the lifeboat was sunk. The Conservatives then had a difficult situation so they switched tack and started looking at unused assets from bank accounts. But after a prolonged agreement between banks and the Treasury it has been agreed this money will be used for projects for young people.”
Those young people will be exactly the sort of customers that O’Brien’s personal accounts project will be targeting. How they react to paying into personal accounts remains to be seen.
Career history – Mike O’Brien
Jun 2007 – present
Minister for pension reform
May 2005 – Jun 2007
Solicitor General, Law Officers’ Department
Jun 2003 – May 2005
Minister of State, Department of Trade and Industry
Jun 2003 – Sep 2004
Minister of State, Foreign & Commonwealth Office
May 2002 – Jun 2003
Parliamentary Under-Secretary, Foreign & Commonwealth Office
May 1997 to Jun 2001
Parliamentary Under-Secretary, Home Office
What kind of political animal is Mike O’Brien?
His voting record on key decisions in Parliament:
• moderately against a transparent Parliament
• moderately for introducing a smoking ban
• strongly for introducing ID cards
• very strongly for introducing foundation hospitals.
• very strongly for introducing student top-up fees
• strongly for Labour’s anti-terrorism laws
• very strongly for the Iraq war
• strongly against investigating the Iraq war
• very strongly for replacing Trident
• very strongly for the hunting ban
• very strongly for equal gay rights
(source – theyworkforyou.com)