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OPINION

An unintended benefit of Personal Accounts

An unintended benefit of Personal Accounts
October 6, 2009
An unintended benefit of Personal Accounts

Now we have delays to the introduction of the government's flagship pension scheme. "Personal Accounts" were planned for 2012 but have now been put back to 2016, inciting much criticism plus a debate about whether the scheme should be halted altogether.

The plan is to automatically enrol every worker who does not already have access to a 'qualifying' employer pension scheme into a national scheme of personal pension accounts. All workers will have to be put into the scheme, in which 4 per cent of their salary is taken away to be invested in their pension, with the employer having to put in a further 3 per cent of salary and the government topping up with another 1 per cent in tax relief.

While many commentators have pointed out that 8 per cent of income is not going to achieve a comfortable retirement, a more pertinent question is where is that 8 per cent is going to be invested to provide the growth required to turn it into a viable pension pot. Dr Ros Altmann, an independent policy adviser, points out that no serious consideration has been given to how people will get good pensions out of personal accounts. Accumulating a fund is not enough on its own - you then have to turn that into income. She believes reform of annuities is essential.

"Politicians are only worried about people putting money in, and the financial companies also see tempting large pools of assets for them to earn fees on, but what matters is that the workers get good pensions out. No proper thought has been given to how the pension income will be achieved. Worsening annuity rates mean the current forecasts of pension outcomes are far too optimistic. Most workers cannot expect to get much pension from their personal accounts," she says.

There are also worries that the introduction of Personal Accounts will cause employers of better-than-average pension schemes to reduce their contribution levels to the statutory minimum.

All this criticism is quite depressing. However, amongst the inevitable detail and bureaucracy of Personal Accounts, there is an invisible hand at work that could bring some major positive unexpected benefits for all defined contribution pension scheme investors.

The Personal Accounts investment consultation paper that was published at the end of May 2009 is an excellent research paper that provides an in-depth analysis of the alternative ways to invest for retirement.

Through the research which has been commissioned, an extensive base of investment knowledge has now been amassed and is there for the taking, offering extremely valuable insight for all investors. Taking in topics such as asset allocation, diversification, investment performance, alternative assets, active and passive management and their relative costs and performance, it makes excellent reading and is completely free.

Plus, its post-credit-crunch date of publication means it examines in detail whether equities should play such a big role in pensions in future. You can download it as a PDF from www.padeliveryauthority.org.uk/documents/investment_discussion.pdf