Government-run pension IT is not cheaper

The pensions administration system that the government proposes should manage the retirement savings of millions of people could not be run more cheaply by the public sector than the private sector, according to consultancy firm Oxera.

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Oxera investigated how much it would cost the government to provide people with personal accounts for their pension contributions and how much it would cost the insurance companies.

The research, which was commissioned by the Association of British Insurers, estimated the initial IT investment and the running costs for both options.

It said, “The information available to analyse large pension systems does not provide evidence to support the existence of economies of scale beyond a certain point, which is 500,000 accounts.”

Oxera looked at UK pension providers’ administration costs, including the IT systems that they have built over years, and concluded that there are limited economies of scale. It said other studies confirmed that large systems stop generating economies of scale past a certain level.

The suppliers running a government-managed personal accounts system would have less incentive to innovate their systems than a group of insurers because the contracts would be long term, the report concluded.