Private sector states case for pensions management

The insurance industry claims it would do a better job of running our finances than the state. By James Daley
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The Association of British Insurers has launched a last ditch attempt to persuade the Government to adopt its proposals for pensions reform, publishing new "independent" research claiming that an industry-run model would cost barely any more than a centrally run system.

The Government is currently deliberating over how to implement a system of personal pension accounts, into which all employed people would be automatically enrolled, and into which employers would be forced to make contributions of 3 per cent of their staff's salary.

While the insurance industry wants to be given the chance to administer and manage the new pension system, the Government is not convinced that its model will meet its target of keeping costs to a minimum. Instead, it is believed to be leaning towards creating a centrally administered system, from which the fund management would be outsourced. This model, known as the National Pension Savings Scheme (NPSS), was proposed in Lord Turner's report published last year, and would in effect bypass the insurance industry.

The new report, released yesterday and written by the consulting firm Oxera, concluded that although an industry-run model would ensure that more companies were involved in the administration and management of the money, this would not add significantly to the cost. Oxera's research shows that economies of scale from managing money are greatly reduced once a fund passes £1bn which, it argues, all funds would manage within a few years of the launch of the new scheme.

The research also claims that economies of scale from having one administrator would not be significant. Robert Branagh of Paymaster, a company vying for the administration contract if the Government opts for the NPSS model, disagrees: "If the Government creates a system which is simple, then the economies of scale will follow, because you're constantly refining your process."

The ABI claims that the principal benefit of its model over the NPSS, is that it will deliver greater choice to consumers. As well as offering a wider range of funds than the NPSS, it would also allow customers to switch providers whenever they wanted.

"This research provides the first thorough economic analysis of the options that are on the table for the Government to consider," said Stephen Haddrill, the ABI's director general. "It shows clearly that cost alone cannot be the decisive factor. It is important now to consider the advantages of competition between providers, together with choice for those who want it."

The research also addresses one of Lord Turner's key criticism's of the ABI model, which he believed would prove more expensive due to providers' marketing costs. However, Oxera claims that if the Government adopted the NPSS model, it would still be necessary to spend money on marketing the scheme, to ensure that people did not opt out, and that there was a good level of understanding of the scheme.

Francis McGee, the head of corporate affairs at Aegon Scottish Equitable, said: "The message to Government from this report is that the advantages they believed existed for the NPSS are at least questionable, and that there is a degree of benefit over time from having a number of providers competing for administration and service, which outweighs the advantages of scale and certainty from awarding a 20-year contract to one company."

Earlier this month, the pensions minister James Purnell said that the Government would produce a White Paper setting out the details of the new personal accounts system before the end of the year. A Pensions Bill dealing with reform of the state system is also expected to be included in the Queen's Speech next month.

However, there is a growing concern in the industry that debate over the detail behind the NPSS is detracting from problems which have not been addressed in the state pension reforms.

Steve Bee, the head of pensions strategy at Scottish Life, said he is concerned that thousands of people will end up automatically enrolled into a new personal pension, only to be penalised for their savings once they retire, because they qualify for means-tested benefits.

"This whole thing represents such bad value for so many people," he said. "I don't think we've had the kind of debate which this issue deserves."

He said pension savings should be invisible to means-tests, to ensure that people are given the full benefit of any private savings.

However, in a response to Mr Bee this week, published on a Government blog, Mr Purnell defended the means-tested pensions credit, pointing out that anyone who saves will still be better off than someone who doesn't. He dismissed the suggestion that means-testing should be abolished.