ABI - First economic analysis of delivery of personal accounts

ABI – First economic analysis of delivery of personal accounts

ABI – First economic analysis of delivery of personal accounts

OXERA RESEARCH PROVIDES FIRST ECONOMIC ANALYSIS OF DELIVERY OF PERSONAL ACCOUNTS
(324 words)

The first economic analysis of proposed models for delivering the Government’s new Personal Accounts for pension saving shows that there is little or nothing to choose between them on grounds of cost. The research was carried out by Oxera Consulting and was commissioned by the ABI (Association of British Insurers).

Oxera examined the economic case for each model set out in the recent pensions White Paper. In particular, they tested whether there are potential economies of scale in administration and/or fund management and whether the absence of brand marketing costs would advantage a centralised scheme.

Following their research, Oxera found that:
. economies of scale in pension administration are limited (beyond 500,000 accounts);
. economies of scale in fund management are only significant for fund sizes up to between £500m and £1bn;
. the likely level of marketing expenditure envisaged for a Personal Accounts market (2% of revenues) is roughly equivalent to the bidding and other transaction costs for a centralised NPSS model of delivery (average of 2.9% of contract value for similar large projects);
. the contract for a centralised model would most probably have to last around 20 years, locking the government into a particular supplier. The winner of the first contract would then have a considerable incumbency advantage, making it less attractive for others to bid when a contract is renewed.
Oxera’s research also suggests that there are potentially greater benefits to consumers from continuous competition between providers rather than a one-off tender exercise. They argue that this will provide more powerful incentives to reduce costs and improve levels of service.

Stephen Haddrill, the ABI’s Director General, said:

“This research provides the first thorough economic analysis of the options that are on the table for the Government to consider.

“It shows clearly that cost alone cannot be the decisive factor. It is therefore important now to consider the advantages of competition between providers, together with choice for those who want it.”

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Notes for Editors

1. Enquiries to:
Alan Leaman 020 7216 7440 (Mobile: 07957 482 330)
Jonathan French 020 7216 7392 (Mobile: 07958 330 480)

2. Oxera’s research is based on economic modelling, a thorough literature search and international comparisons. A copy of the full report, How to evaluate alternative proposals for personal account pensions, is available via the ABI website, www.abi.org.uk.

3. The ABI is the trade association for Britain’s insurance industry. Its nearly 400 member companies provide over 94% of the insurance business in the UK. It represents insurance companies to the Government, and to the regulatory and other agencies, and is an influential voice on public policy and financial services issues. ABI member companies hold up to a sixth of all investments traded on the London Stock Exchange, on behalf of millions of pensioners and savers.

4. An ISDN line is available for broadcasts.
Copies of all ABI news releases, together with other information from the Association, can be seen on our website http://www.abi.org.uk

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