The news that a second bidder has pulled out of the running for the administration contract for personal accounts, the UK’s planned nationwide, low-cost pension system, might lead some to question the stability of the personal accounts concept.

Logica UK has followed Danish pension administrator, ATP, in withdrawing from the bidding process for administering personal accounts, which are due to be implemented in the UK from 2012 onwards.

Personal accounts are a key part of pension reforms designed to ensure that the 7 millions workers currently making no pension provision do so in future, but the Personal Accounts Delivery Authority (PADA) faces a series of challenges in making personal accounts

a reality.

Unlike the Australian superannuation pension system, personal accounts will not be compulsory. But employers will be required to auto-enrol staff into personal accounts, or their own pension scheme which meets certain qualifying standards.

For their part, employees will have the right to opt out, but it is hoped that inertia will ensure most employees stay enrolled. How many will opt out is an unknown and cause of uncertainty for those businesses which need to take account of personal accounts.

In this sense, personal accounts are like the New Zealand KiwiSaver pension plan, which also uses auto-enrolment and an opt-out system. Personal accounts will offer a simple range of investment funds, with a target return fund as the likely default fund choice.

PADA is working hard to cap charges at 0.5% a year and total contributions will reach 8%, with employers contributing 3% in time, employees 4% and tax relief adding another 1%.

In order to win employer acceptance, the employer contribution will be phased in from 2012 to 2016, with an initial 1% contribution. But employer bodies fear that the contributions will raise their costs and add to red-tape, while other critics say that personal accounts could undermine company pension schemes, by ‘levelling down’ contribution rates and options offered.

There are also signs that the political consensus over the need to introduce personal accounts is unravelling, as the Conservatives say that they will review the reforms if they take office next year.

In one recent straw poll seen by CoreData, 70% of scheme managers and consultants said political uncertainty was starting to damage the personal accounts concept, with several individuals sceptical as to whether the reform package will be realised.

In this sense, personal accounts could be a victim of bad timing, as the next general election will come at a critical time in their construction.

The fact that low income individuals might save into a personal account and then lose out on means-tested state benefits in retirement is also seen as a flaw in the concept by some.

The government has downplayed this issue, but there must be fears that the tabloid press could run ‘scare stories’ on how the low paid could lose out with personal accounts.

Overall, building a new pension system on the shaky foundations of the UK’s complex mix of state and private pension provision is difficult enough at the best of times.

Doing so when a general election is looming and the economy is in the doldrums will be even tougher.

The Olympics has to happen in London in 2012, but not everyone would stake their mortgage on the arrival of personal accounts, as they are currently planned.