August 2008

Charging ahead

A few weeks ago the Personal Accounts Delivery Authority (PADA) gave us an update on the latest position regarding charges for the new personal accounts scheme. This update doesn't really take us much further. PADA did confirm the charges will be either a single annual management charge (AMC), or a combination of AMC and a contribution charge. While the Government frequently mentions it would like charges to be around 0.5%, it still hasn't made any final decisions on either the shape or size of the charges under personal accounts.

So can we learn any lessons from overseas? The Pensions Policy Institute (PPI) recently examined the Kiwisaver. At first glance the charges under this new system look very positive, with passive or cash investments available at 0.5%. Surely this means the personal accounts scheme will have no problem operating at a similar 0.5% charge?

However, if we scratch below the surface of the Kiwisaver a little more, you begin to see how these charges are achieved: through state subsidies. Administration expenses under Kiwisaver are subsidised by New Zealand taxpayers in two ways. Firstly, the NZ government pays providers of Kiwisaver accounts NZ$40 (GBP15.35) a year to help cover administration costs. Secondly, the NZ government employs 425 staff to collect contributions. This is broadly equivalent to a further subsidy of around NZ$35 (GBP £13.43) per account per year.

This means the true cost of administration for the most basic default Kiwisaver accounts is 0.5% PLUS approximately £29 a year. If the UK Government were to adopt an identical system the equivalent charge would be higher, due to significant differences in earnings between NZ and the UK. In New Zealand, average weekly earnings are the equivalent of £376 for men. In contrast this is around £606 for men who work full-time in the UK, 61% higher. Women working full time in the UK earn around £462, 54% higher than the £299 in NZ.

Applying this logic would give equivalent UK personal account charges of 0.5% PLUS approximately £45 a year. If charged as a single annual management charge, rather than a dual charge, the charge would need to be around 0.8% based upon an average member age of 42.

So to achieve the much talked about 0.5% charge under personal accounts it looks likely that the Government would need to go down the same route as NZ, and subsidise our new pension system. If the Government has the appetite to do this, it has to have the will and guile to sidestep European Union rules on state subsidy.

On the one hand the Government has said that it expects personal accounts to financially stand on its own two feet. But, on the other, it has continued to give large amounts of money to PADA - £57 million at the last count - and said that personal accounts will only 'be self-financing in the long term'. Perhaps we also need to factor in that the Government seem to be perilously short of cash and an economic downturn is looming.

Whichever route is chosen, a decision sooner rather than later is vital as this will allow employers and their advisers time to decide on the best course of action.

As a final aside, many members of large group personal pensions and group stakeholder pensions in the UK pay charges between 0.3% and 0.8% for actively managed funds rather than tracker funds. This is without a penny of government subsidy. Perhaps these schemes aren't such bad value after all?

Andrew Tully
Senior Pensions Policy Manager
Standard Life