12 December 2006 - CRA International publishes the findings of research exploring the potential value of brands competing in the personal accounts market.
Today, CRA International publishes the findings of research exploring the potential value of brands competing in the personal accounts market. The inclusion of branded fund choice in personal accounts is one of the main options which will be examined by the delivery authority. This research forms part of a wider programme of research for the Government’s proposals on personal accounts which were set out in the White Paper on pension reform ‘Security in Retirement: towards a new pensions system’ published in May 2006.
The report focuses on the two major types of delivery models for personal accounts, the National Pension Savings Scheme (NPSS) and an industry-led model. The two models were compared according to whether they bring benefits in terms of static1 and dynamic efficiency2, as well as the cost of branded choice. The report ‘Competition in personal accounts’, also by CRA International3 is published alongside this and should be read in connection with this report.
Economic research conducted by CRA International showed that brands may bring some positive advantages to savers, albeit modest. Research in the White paper ‘Personal accounts: a new way to save’ published in December 2006 found that including brands in personal accounts are potentially at the cost of simplicity and lower charges. If the personal accounts products offered by different providers were similar (because of extremely prescribed product terms) then there would be no significant advantage or disadvantage from allowing branded choice.
An advantage of a model with brands is that over time there is the potential for consumers who learn about personal accounts to become more active in making choices. This may occur even if they are not very active at the start of the process. Both the industry model and the NPSS have this potential in fund choices. Research in the report shows that individuals who purchase more financial products are more financially capable. However, it is unclear whether more financial products causes financial capability or whether financial capability enables consumers to purchase more products.
Similarly, there is the possibility that the personal accounts market could develop in the future (as has been seen gradually in the market for mortgages and current accounts) through brands competing. The report suggests that the movement to a ‘direct-to-consumer’ market (in contrast to the existing intermediated market) could change the competitive nature of personal accounts compared to the existing market leading to dynamic efficiency gains.
The report states that too much choice may lead to increased opt out. The evidence shows that people prefer a limited choice of providers as opposed to choosing from the whole market. Furthermore, while too much fund choice is also seen as confusing, different fund management options may attract consumers who value more choice than others.
The report concludes that costs associated with branded choice seem reasonably modest since excessive advertising has not been observed in stakeholder pensions, where the price was constrained. Search costs can be minimised in personal accounts through the use of the default fund.
The disadvantage of including brands is that concerns remain regarding the role of advertising in encouraging consumers to select funds with higher risk and fees and this needs to be taken into account when considering any price cap if one is used.
Notes to editors
- The report can be downloaded from CRA International’s website http://www.crai.com
- CRA International Report ‘Branded choice in personal accounts’, is published on 12th December International website. The report was commissioned by DWP to CRA International and was prepared by Kyla Malcolm and Tim Wilsdon.
- CRA International are publishing a separate report ‘Competition in personal accounts’ on the same day which can downloaded on http://www.crai.com
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Prepared by: Department for Work and Pensions Pensions Analysis Directorate