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Not my normal subject - not by a long way. But back when I had a job (aah those days, how little I miss them), this was what I worked on.

The RSA’s new report, written by leading fund manager David Pitt-Watson and his anonymous helpers, explains how we can solve Britain’s pensions crisis. It’s a big claim. For once, I think, it can be supported.

The basic idea is to take the system of Personal Accounts - proposed by Lord Turner in his report and scheduled to come into being in 2012 - and open it up to private companies:

The pensions system would then begin to look like the energy industry, where a natural monopoly is accessed by a variety of different suppliers who act primarily as sellers. That reform has achieved impressive savings for consumers. By cutting out marketing and persistency costs, this change would be able to do much the same.

Marketing and persistency are the two main costs associated with private pensions. Marketing = the costs associated with selling. Persistency = the costs associated with changing pensions, because each time you do that it costs that bit extra in administrative fees. A scheme like Personal Accounts would remove both those costs by virtue of being compulsory (ok, it’s opt-out, but that should be the same thing). When everyone has to take part, then pensions don’t need selling, and you don’t get switching either.

But Personal Accounts has a problem. It can only take pensions payments under £3,600 a year. The fund management industry demanded this feature when the scheme was set up. They thought that it would prevent Personal Accounts getting off the ground. They were right.

If Personal Accounts can only take payments of £3,600 a year, then anyone who wants to pay more than that will be forced to look elsewhere, including the directors of most companies. This means that firms will have to arrange a dual system of pensions, which will be difficult and inefficient (one reason why experts believe many people may end up opting out). More importantly, it also means that Personal Accounts will be left with the unprofitable low earners, while the lucrative high earners go elsewhere. In other words, Personal Accounts is crippled before it even starts.

The RSA report proposes to lift the £3,600 limit by allowing private companies to take customers who want to pay more. If Personal Accounts go ahead, this might be the plug-in they need to function successfully. The question is: will a new government be able to resist cutting this gargantuan scheme that is certain to prove unpopular, at least initially, for employers and workers alike? In an era of “tough choices“, that might prove just that bit too easy.

UPDATE (23.09.09): From the FT’s coverage of the report:

David Cameron, the Conservative leader, said on Tuesday that if his party wins the general election it will want to review personal accounts, and Nigel Waterson, the party’s pensions spokesman, said the report is “a well-informed, well-argued document” which he looked forward to discussing further.

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