Andy Fleming, Associate Director at Penrose Financial, considers the possibilities of pension reform in Britain's Olympics year.

At my regular local Nerds Anonymous meeting the other day, somebody mentioned that every time London hosts the Olympics, something really important happens in the British pension system. First time round, in 1908, the Old Age Pensions Act was introduced, putting in place the first state pension. In 1948, the post-war Labour government brought in reforms to the state system which have remained largely unchanged to the present day. And 2012 will see the launch of personal accounts.

The discussion then degenerated into an argument about the new range of kagools at Millets, but I have to confess my thoughts were still mulling over the pensions/Olympics debate, and in particular, the alarming possibility that lasting improvements to the pension system only seem to happen with the same regularity with which the UK hosts the Olympics. So if we don't get it right this time, who knows when the next opportunity might crop up?

Rather like the Olympics, the path to personal accounts has been long, difficult and controversial, and serious question marks still remain over the timing and success of the event itself. But unlike most of the tinkering that successive governments have passed off as pension policy over the last six decades, personal accounts have the unique advantage of consensus – throughout most of the financial services industry and across the political parties. However difficult it looks, and however much people may argue about the details, at least we can all safely assume it's going to happen. The key legislation has been passed, an independent Personal Accounts Delivery Authority (PADA) is in place, and the financial services industry is beginning to wake up to the realities of the new regime.

Personal accounts are, it is widely agreed, a "good thing". With some 7 million Britons unwilling or unable to save for their retirement, the new system will automatically enroll into a pension anyone who is working but not currently saving. Individuals will contribute 4% of their gross salary to their own personal account, with contributions from employer and government adding another 4%. The idea is that people will save almost by default, as they can't be bothered with the hassle of opting out (thought they can do this if they like).

In its 2006 White Paper, "Personal accounts: a new way to save", the government estimated the new system, once fully up and running, could generate up to £8bn of saving each year, "of which approximately £4 to £5 billion will be new saving." Fund managers, it suggested, could find themselves competing to invest up to £150 billion accumulated in personal accounts in the long term, while pensions administrators could find themselves managing the accounts of up to 10 million customers.

Such figures are inevitably open to variation between now and 2012 – events in the global markets over recent months prove all too starkly the difficulty of making accurate predictions. These days, £150 billion is hardly enough to bail out UK banks. But it's still a hefty chunk of money, and few fund managers would turn their noses up at these kind of figures. And while questions still remain over issues like the level of charges, and the extent of government regulation, personal accounts will offer an exciting new opportunity for fund managers to handle the retirement savings of millions more Britons. As the government said, with admirable understatement, in its White Paper, "developing investment strategies is not an area of Government expertise." The document acknowledges that personal accounts must "have independence from both politicians and pressure groups", and it is with this in mind that PADA is to consult this year on the specifics of the new regime's investment strategy.

What we do know is that there will be a default fund, and if current experience is anything to go by, most personal account holders are likely to opt for the default (research from the NAPF recently suggested that some 94% of DC pension savers are in default funds). There will be alternative options for those savers who wish to make active investment decisions, but in drawing up its detailed proposals, PADA is aware that experience in the US, Sweden and elsewhere indicates there is some danger in offering too much choice. Consumers are more likely to participate if they are offered a handful of choices, rather than a shedful. Evidence from 401(k) schemes in the US shows participation rates are 75% for schemes with two funds, but drop to around 60% in schemes with over 50 funds. So although there will be a big cake, there'll be a carefully limited number of slices.

We can also expect that the alternatives on offer will, in response to consumer demand, particularly amongst younger people, include what the government calls Social, Environmental and Ethical (SEE) investments. While ethical funds currently account for under 2% of total UK retail funds, the concept is clearly high on the government agenda, even before the publication of PADA's investment consultation. Allied to growing interest among institutional investors in responsible investment, the advent of personal accounts could signal a step change not only in how many people save for retirement, but also in how they invest their money.

The 2012 pension changes still resemble something of a legislative building site. But even amidst the gloom of the current financial services industry, personal accounts will offer significant opportunities for fund managers, administrators and others.

By Andy Fleming.  Published in the February issue of Pensions World