12 December 2006 - Publication of DWP- commissioned report: ‘Competition in personal accounts’
Today, CRA International publishes the findings of research exploring how competition will work in the personal accounts market. This study forms part of a programme of research and analysis to gather evidence to inform the Government’s proposals on personal accounts as set out in the White Paper on pension reform published in May 20061.
The aim of the report is to assess the main features of the two major types of delivery models for personal accounts, the National Pension Savings Scheme (NPSS) and an industry-led model, in terms of their impact on competition. ‘Branded choice in personal accounts’, also by CRA International2 is published alongside this and should be read in connection with this report.
The findings from the economic research conducted by CRA International for DWP in support of the NPSS model are:
- A limited panel like in the NPSS model is required to encourage active participation in the market to overcome problems when consumers are faced with too much choice. Losses of dynamic competition and product innovation through using a limited panel are likely to be small. Innovations arising from outside the personal accounts market can be brought into personal accounts when needed through panel selection.
- One single centralised clearing house can reduce persistency problems in the pensions market and exploit economies of scale, which lowers costs and increases the number of people for whom it becomes economic to provide pensions. There is no loss from removing differentiated payment systems. In the NPSS model, competitive restraint on costs can be imposed by putting out to tender contracts to service providers.
- Allocating consumers who do not make an active choice to a common default fund as happens in the NPSS ensures consistency in outcomes and avoids the risk that customers may face different returns and service purely by chance, which would occur in industry-led models. Competitive forces can be imposed by consumers actively choosing products; but the reduction in competition that arises from using a default fund where consumers do not choose a provider is likely to be small. This is because a large proportion of the target market is highly unlikely to impose competitive restraint in any model. Instead competition to be a default provider would bring larger benefits.
- Price constraints may be useful to protect consumers who are automatically enrolled in personal accounts and who are unlikely to actively search the market for the best value product. They could be set through a bidding process or auction mechanism in the NPSS model. If there is an open market of providers in an industry model, Government would be responsible for setting the price caps with the risk of getting them wrong.
Other findings:
- Whether customer information and customer query handling is centralised or not seems to have no major impact on service provision. A risk for the centralised customer information is that consumers may opt out of personal accounts if there is no option of changing provider in light of poor customer service. Good contract design giving providers incentives to provide high quality service can mitigate this risk. A separate report published by the ABI3 shows positive evidence from large contract industries where providers were given incentives to provider good customer service.
- The introduction of personal accounts could potentially affect the provision of existing pension products including individual and employer sponsored pensions. However, personal accounts have been designed to complement, rather than replace, existing employer-sponsored provision. The personal accounts White Paper Personal accounts: a new way to save details a series of proposals to ensure that the personal accounts scheme remains focused on the target market of employees without access to employer-sponsored retirement saving. To achieve this the Government will introduce simple scheme exemption tests to allow those employers that offer pension schemes which are equivalent to, or provide more generous benefits than, personal accounts to automatically enrol their employees into those schemes rather than personal accounts. Furthermore, there will be contribution caps to keep personal accounts focused on our target market of low to moderate earners and no transfers will be allowed into and out of personal accounts.
Note to Editors
- CRA International Report ‘Competition in personal accounts’, is published on 12th December on the CRA International website. The report was commissioned by DWP to CRA International and was prepared by Kyla Malcolm and Tim Wilsdon. The report can be downloaded from CRA International’s website http://www.crai.com
- This research was commissioned alongside the report ‘Branded choice in personal accounts’, also by CRA International and should be read in connection with this report.
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Prepared by: Department for Work and Pensions Pensions Analysis
and Stewardship Directorate