Cicero Policy Briefer

Issue 11, April 2007

Pensions reform: Why competition must prevail

By Steve Folkard, Head of Pensions and Savings Policy, AXA

All of you reading this will be very familiar with the many arguments that have been put forward for and against the different methods of delivering personal accounts. Delivery, that is, to the millions of people who do not have access to employer schemes, on behalf of the hundreds of thousands of small employers who have never been persuaded to establish schemes for their staff.

I do not propose to revisit those arguments here but rather to consider what risks may be posed by the current white paper proposals and why a rethink may still be needed.

That the industry cannot deliver pensions cost-effectively to this target market has not been in dispute. The current regulatory environment coupled with the marketing costs of persuading reticent employers to contribute make this a poor proposition where employers are not required to match the auto-enrolled contributions of their staff. However, even with auto-enrolment the costs of dealing with multiple employers, many of whom may not be willing advocates of personal accounts, will represent a significant challenge for the Delivery Authority.

The commercial difficulties of operating what will effectively be the largest occupational scheme in the UK, with the most diverse range of participants, will not be lost on the individuals who step up to the plate to run the Delivery Authority. It is not lost on the pensions industry either. With a significant emphasis on cost during the myriad of government statements on personal accounts, the delivery authority will be faced with a challenge of delivering a low cost scheme whilst securing the capital to establish an infrastructure which will be capable of delivering a robust administrative experience for a considerable time.

While resisting the temptation to reflect on the recent history of IT implementations for public services, the financial challenge remains. Securing a charge from the scheme that treats members fairly while ensuring a reasonable return on capital for the participants will be essential to ensure that the scheme does not have to secure alternative funding.

The importance of this point should not be underestimated. The political desire to deliver a low cost solution, one of the main reasons for adopting the personal accounts proposal recommended by the Turner review, should not be at the expense of the taxpayer or the public purse. Nor should it be at the expense of communicating the value of benefits to members in a way that encourages them to take more personal responsibility. No one believes that auto-enrolment will achieve this, and in a way, the need for a national strategy on financial capability reinforces this point.

So why must competition be allowed to prevail?

Because if a personal accounts solution has to resort to public funding to support the cost of its infrastructure, while also looking towards other financial capability initiatives (which will also require funding) to deliver the uplift in ‘personal responsibility’, someone may begin to question—as AXA did some time ago—whether the whole scenario wouldn’t have been more cleanly dealt with by proposing a publicly funded solution in the first place.

The worst possible outcome would be for a personal accounts solution to be launched on a basis that would require additional support in future. This would leave future governments with the difficult choice of raising capital by raising charges, or finding alternative sources. Raising commercial capital is inevitably more expensive than calling upon the taxpayer, and raising charges would present difficult political challenges.

Competition cannot be avoided. It is an inherent factor in personal accounts. The government competes with the open market in its search for capital, and personal accounts will compete for their member contributions with the attractions of spending and borrowing in today’s consumerist society.

It is a reality well understood by pensions providers used to competing in a price-capped environment. The regulatory environment may well need to be adapted to allow personal accounts to succeed. If that is the case, then an acid test will be whether existing, good value provision, is an equal beneficiary of any reforms. If not, competition will have been distorted, and ultimately, the public will be worse off.

Steve Folkard is the Head of Pensions and Savings Policy at AXA, and can be contacted here.

Back to main policy briefer