The estimate was updated to reflect the availability of more recent data on the number of employees, and their salaries, that will benefit from the introduction of personal accounts.
The revised estimate is based on the 2005 datasets of the Annual Survey of Hours and Earnings and the Small and Medium Enterprise Statistics. The previous estimate was based on 2004 data.
The Government have revised the estimate using the standard cost model to reflect refined assumptions about the detailed processes employers will need to undertake to set up and run a personal accounts scheme and the time that these will take (annex 1 of the regulatory impact assessment, “Personal Accounts: a new way to save” provides details).
As explained in the regulatory impact assessment, “Personal Accounts: a new way to save”, a degree of uncertainty remains due to the sensitivity of this estimate to assumptions made. The cross-government analytical group mentioned in the regulatory impact assessment, “Personal Accounts: a new way to save” (paragraph 4.104) has been set up and is continuing to work to refine these assumptions and estimates.
The White Paper, “Personal Accounts: a new way to save”, was clear that this was an issue for further consultation and we look forward to receiving a range of analysis and views on this issue. The final decision will balance the twin aims of focusing personal accounts on moderate to low earners and allowing sufficient flexibility for individuals within the scheme who wish to save more.
The Government are keen to create the right environment for retirement saving, both in the run-up to the implementation of automatic enrolment and personal accounts in 2012, and beyond. Following the publication of the White Paper “Personal accounts: a new way to save”, the Government are consulting on an annual contribution limit into a personal account of £5,000, in order to focus the new scheme on the target market. However, the White Paper proposed a higher limit, of £10,000, in the first year of personal accounts, in order to help any individuals with accumulated non-pension savings to consolidate that saving into their personal account. We will continue to work with stakeholders in the financial services industry and elsewhere in examining this and other ways of promoting saving in the period before 2012.
The minimum employer contribution of 3 per cent. will be included in the primary legislation that establishes personal accounts. This minimum contribution will be phased in over three years: 1 per cent. in the year personal accounts is launched, rising to 2 per cent. in second year, then 3 per cent. in year three, which will continue in perpetuity. A three-year phased introduction of contribution will help employers adjust during the introduction of personal accounts, while enabling individuals to achieve scheme minimum saving levels as soon as possible.
The following table shows the impact of different phasing lengths.
Figures in the table are in 2006-07 earnings terms and are rounded to the nearest 100.
Age in 2012 Final pension pot with three year phasing Final pension pot with four year phasing Final pension pot with five year phasing Final pension pot with six year phasing 25 78,400 77,300 76,200 75,000 35 56,800 55,800 54,700 53,700 45 33,400 32,500 31,600 30,700 Notes: 1. This figure is for illustrative purposes only. It should not be used as the basis for individual decisions as specific circumstances or variation from the underlying assumptions will lead to different results. 2. The base assumptions used here are the same as those underpinning the analysis in ‘Financial incentives to save for retirement’ (which are detailed in Appendix A of this publication).
Following their December White Paper “Personal accounts: a new way to save” the Government are consulting on the appropriate method of charging members for personal accounts.
We have received representations suggesting a number of alternative charge structures and, at this stage, are not ruling anything out or in.
As set out in paragraph 4.11 “Personal accounts: a new way to save”, the ideal charge structure for personal accounts would have the following attributes:
Simple and easy to understand (for example, easily comparable to other pension products in the market);
Fair to all members, taking into account an individual's ability to pay;
Incentivises the scheme operator to maximise the fund value;
Incentivises members to help keep costs down; and
Provides significant revenue in the early years of operation, thus reducing the amount and length of operating losses, and reducing financing costs.