So what should the UK’s personal accounts system look like?

Not like that of Sweden if Mike O’Brien, the UK minister for pension reform, is to be believed. At the end of last year he branded it a failure.

Speaking at the FT’s Leadership of Pensions Summit in November, he suggested that a lack of simplicity and other logistical problems had severely hindered the Swedish personal accounts effort.

“There are some question marks [over the Swedish model],” he said at the time. “But our system is not going to be something with lots of bells and whistles on it. It’ll be a very simple, basic calculation and management operation.”

Five months on, finer details of what the UK model will resemble are few and far between, but Paul Myners, chair of the Personal Accounts Delivery Authority (PADA), the public advisory body created to get a workable system up and running, provides a broad outline.

“The system will be simple, straightforward and delivered at a low cost,” he told an audience at last month’s National Association of Pension Funds conference in Edinburgh. “Over the long term, the system will have to be self-financing – you can be sure of that – but it will be delivered at an acceptable price to savers.”

Tim Jones, who was appointed chief executive of PADA in October last year, agrees: “Although charging structures appear to be a relatively small barrier to acceptance of personal accounts, if the structure is not simple, transparent and explained clearly it could cause trust to be lost in the scheme and prompt opt-outs at the first hurdle.”

With half a mind on the Swedish platform, PPM, which consists of some 700 fund options, Mr Myners also expressed concerns over fund choice. “There is an issue with regard to the range of investment choices we offer,” he said. “Choice is a good thing but too much choice is bad. The number of funds we offer needs to be meaningful and the people making choices need to understand the implications of those decisions.”

Indeed, despite the fact that the Swedish platform offers a wide range of funds, four out of 10 savers invest in the default option, the premium savings fund managed by AP 7. Daniel Barr, PPM’s chief economist, who says the organisation is unable to reduce the number fund options without changes being made at a legislative level, concedes that something needs to be done. “In the end, I think we will introduce an annual fee for funds to participate in the system,” he said. “Only then will we see a fall in the number of choices available.”

With that in mind, PADA says it will consult the market extensively on how a UK default fund should be constructed. Assets gathered within the personal accounts system are expected to grow to between £100bn (€125bn) and £200bn by 2050. Getting the default fund right is imperative.

“Without a doubt the default fund is going to be very important,” said Mr Myners. “Experience tells us that perhaps as many as 85 per cent to 90 per cent of members will fall into it and as such we will consult extensively on what that fund should look like.”

Our desire for low cost, he continues, “will result in a passive style of management being at the heart of our investment process, particularly in terms of the default option”.

Mr Myners says the onus is on active asset managers to convince him otherwise. “If they have evidence that paying more results in higher pensions then I more than welcome that. In my 25 years in the industry, however, I have found that keeping costs down has a powerful impact on the pension you receive.”

During the latter half of this year, PADA, which was established by the Pensions Act 2007, will issue the results of a consultation document on pricing and whether there should be a common pricing policy for listed funds or whether they should be priced differently. The organisation plans to launch two further consultations: one will look at fund structures and investment choice and the other will examine the scheme’s rules.

OUR VIEW

Exact details of what the UK’s forthcoming personal accounts platform might look like are scarce, but there is one thing you can bet your house on: the Personal Accounts Delivery Authority will concentrate on cost.

The fact that the organisation’s chair, a certain Paul Myners, has revealed that passive management will be at “the heart” of the platform’s investment process – including the construction of the default fund – indicates his intent.

In a call to active managers he said: “If they have evidence that paying more results in higher pensions then I more than welcome those findings.”

But should active managers feel aggrieved? It is a well known and much over-used fact that 75 per cent of managers never beat the benchmark; but does that mean savers should not at least be given the option of trying?

The Swedes have plumped for a system where choice is everything. The problem is that, in their quest for variety, the very essence of what they were trying to achieve has been eroded. Bewildered by a large number of fund options, 40 per cent of Swedes have decided to do nothing at all, favouring to leave their money in the default fund. At least, however, that fund is a mixture of both active and passive management.

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