Memorandum submitted by Aegon



The Government published a White Paper[1] on pensions reform in May 2006, setting out the Government's proposals for reform of State pensions and the introduction of new system of Personal Accounts (PAs). The Pensions Bill takes forward the proposals on State pensions. It will also establish a "Personal Accounts Delivery Authority" to oversee the introduction of PAs. A further White Paper[2] in December 2006 set out in more detail the proposals for PAs. These are expected to be the subject of legislation in the next Session.


A decent State pension is essential to reduce dependence on means-tested benefits and so provide incentives for private saving.

While restoring the link between earnings and the Basic State Pension will undoubtedly help, we fear that the Government's reforms do not go far enough. In particular, at least one third of people may still find themselves subject to means testing and having their benefits scaled back if they have private savings. This casts doubt on whether auto-enrolment into Personal Accounts will be appropriate for large numbers of people at the lower end of the earnings scale and those who are single or rent in retirement.


We have misgivings about the Government's proposals for the reform of the State Second Pension (S2P) and have put forward proposals which would provide a better underpinning for the proposed new Personal Accounts.

Currently S2P represents a compulsory earnings-related pension for all employees. Those who contract out move this to a funded private basis, through a defined benefit scheme or a personal or stakeholder pension. The Government's proposals would remove the earnings-related component and take away the opportunity for individuals to move this into a private funded pension. This seems to go against the aims of both the Pensions Commission and the Government itself, and stores up greater unfunded liabilities for future taxpayers.

AEGON's alternative

We believe the Government should replace contracting out with a stream of earnings-related payments into Personal Accounts or other pensions, drawn from existing levels of National Insurance contributions. This would create a ready-made mechanism whereby every employee would have some earnings-related contributions into a private funded pension of their choice.

This would avoid the need for a new payment system, would not change the NI that people pay, and would signal Government encouragement of the need to contribute to Personal Accounts.


The establishment of a Personal Accounts Delivery Authority (PADA) requires careful consideration. While we welcome the extra detail in the recent Personal Accounts White Paper, we would like to see more detail on the face of the Bill regarding PADA's powers and duties. In particular:

PAs must be focused on the target group - those who are currently not saving and do not have access to a pension through their employer. The aim should be to encourage more saving, not just more savers. A key test of the arrangements - and so for PADA - will be to ensure that they act as a springboard to increased private saving and do not become another threat to the occupational pensions of working people, with employers cutting contributions to cover the cost of auto-enrolment.

PADA should have a duty to ensure that individuals and employers have access to information about their rights and responsibilities under the new system, and to basic "generic" advice taking into account their own circumstances. The impact of means testing makes this especially relevant to lower earners and other vulnerable groups in deciding whether it is in their interests to participate.

It will be important to ensure a level regulatory playing field between PAs and other pensions.


January 2007

[1] Security in retirement: towards a new pensions system (Cm 6841, DWP, May 2005)

[2] Personal accounts: a new way to save (Cm 6975, DWP, December 2006)