Cicero Policy Briefer

Issue 9, February 2007

Pensions reform full speed ahead

By Mona Patel, Head of Communications, Investment Management Association

With a Bill going through Parliament and debate raging around a second White Paper, pensions reform is going full speed ahead. It may seem like years since the Pensions Commission published its proposals for a national pensions savings scheme, and there have certainly been many years’ worth of debate around the subject. In fact, though, it has been just over a year and the first legislative steps are already being put in place, with provisions for a Personal Accounts Delivery Authority being debated in Parliament. What for some may have seemed like a distant prospect is now looking more and more like it may actually happen.

That’s not to say that it will be quick. The proposed timetable will mean that personal accounts will not be up and running till at least 2012, and experience from Sweden and New Zealand bears out the need to take time to get this right.

What is clear is that the best option has been chosen in the Pensions Commission's centrally administered model for a system of personal accounts. It is this model, more than any of the alternatives put forward, which stands the best chance of delivering a successful personal accounts system and of significantly boosting savings among the lower-income target group. This key decision marks the most radical reform of pensions in a generation and further decisions will be needed over the coming months to ensure a system that will work smoothly and sit comfortably with existing provision.

So, why is this the best model?

It works for small employers by providing a single point of contact and the minimum of red tape. It gives investors a simple, low cost, but professionally managed default option, overseen by an independent board whose duty is to act in their interests. And it enables the expertise of the financial services industry to be brought to bear on the management of personal accounts. Furthermore, the establishment of a Delivery Authority will ensure that important detailed decisions benefit from industry and commercial expertise.

It will be important from the outset that the Delivery Authority and its successor, the Personal Accounts Board, have clearly defined roles. The Board must be independent of Government and free from political interference in order to ensure its long-term success. It must therefore be specifically able to make expert technical decisions without political interference.

Of course, none of this will work without clear interaction with state benefit structures, so we await with interest the outcome of the current Bill with its focus on the state system. At this stage nobody, not even government ministers, knows what the structure of state benefits will be when the first Personal Account pensions start to be paid. What is clear, though, is that the Government will need to keep the issue under close review, and take steps to ensure that individuals are not penalised as a result of the decision to remain auto-enrolled in the system.

Mona Patel is the Head of Communications at the Investment Management Association and can be emailed here.

Back to main policy briefer