Complex personal accounts charging structure penalises lower earners

In light of the news that the Personal Accounts Delivery Authority (PADA) has launched a consultation into the charging structure of the proposed new personal accounts, Aon Consulting has issued the following comment:

Helen Dowsey, Head of DC at Aon Consulting comments:

ìIt is vital that the charging structure should be kept as simple as possible to avoid confusion among DC pension scheme members. We would advise against combining an annual management charge with a contribution charge and/or joining fee.

ìA contribution charge will benefit members paying higher contributions as the fixed cost will represent a lower percentage of monies being invested. However, a fixed cost will penalise lower earners making smaller contributions, as this will make up a larger relative proportion of their salary. Given that the Government has designed personal accounts specifically with lower earners in mind, this would seem a regressive step.

ìMost DC plans currently operate with an annual management charge only, with pension providers working on the assumption that the plan will become profitable in three to five years. This business model works well and although there are valid arguments for making personal accounts profitable more quickly by levying a joining fee, the justification for doing so does not seem strong enough.

ìAnnual management charges, which levy a fee as a percentage of the fund value, have been criticised as being unfair on larger funds but there are various ways to overcome this, such as capping the amount that can be earned in any one year, or reducing the annual management charge as the fund grows in size. Controls of these types are should be looked at carefully by PADA as they would be likely to encourage members to save more.

ìGiven the options available to PADA, in order to encourage individual saving and create a relatively simple system, Aon Consulting would recommend an annual management charge that starts at a higher level initially ñ say 0.5 to 0.6 per cent - but reduces as the individualís fund reaches specified amounts.î