Memorandum submitted by AEGON (PE 05)

 

Pensions Bill

Key points

1. Personal accounts must be made to work. Public trust in pensions has been undermined in recent years and millions of people aren't saving enough for their retirement. The successful introduction of personal accounts would help restore confidence and the new requirement for automatic enrolment should help boost take-up of pensions across the board.

2. Personal accounts should be targeted at those who can't access a workplace scheme. The employee benefits provided by existing workplace schemes are typically better than those offered by personal accounts. There's a clear risk that some employers will close or scale down contributions to existing schemes because of the increased cost of automatic enrolment. This could lead to lower retirement incomes for up to four million people. The government must give the Personal Accounts Delivery Authority (PADA) a clear duty to focus on the target market and avoid undermining existing provision.

3. The government must show flexibility over auto-enrolment so that EU rules don't force good existing schemes to close. European legislation currently prevents automatic enrolment into certain types of pension scheme. We're working with the government on a 'streamlined joining' process which would produce outcomes similar to or better than 'pure' auto-enrolment.

4. Charges can go up as well as down. The scale of the scheme and uncertainties over take-up, contribution levels and persistency mean there'll be significant financial management challenges for personal accounts. The management charges applied to personal accounts should aim to match the initial and ongoing costs as closely as possible and it needs to be made clear to planholders at the start that charges can go up as well as down.

5. Personal accounts should not get special treatment. Employers will face a direct choice whether to enrol their staff into personal accounts or into a private pension scheme. There should be a level playing field in terms of regulation and no subsidy to personal accounts from the taxpayer or any other source.

Background

It's widely accepted that many people in Britain - the government puts the figure at seven million but acknowledges that it may be higher[1] - aren't saving enough to give them the sort of income they want when they retire.

The report of the Pensions Commission[2], chaired by Lord Turner, recommended the introduction of a 'National Pension Saving Scheme' (NPSS) aimed primarily at low- and medium-earners who don't currently have access to a workplace pension. The Pensions Bill takes forward the government's proposals for a new scheme of 'personal accounts' broadly in line with Turner's proposals, to 'go live' in 2012.

Our view

The overarching aim of pensions reform is for more people to save more to give themselves enough income in retirement. The best way to achieve this is to encourage employers to operate good work-based pension arrangements and to open them up to all employees.

Where employers won't provide work-based pension arrangements, personal accounts should be developed to give employees a new work-based option with an employer contribution. However, it is important that the existing market isn't undermined - there's a real danger that existing savings will be diverted into personal accounts, which wouldn't contribute to that overall aim.

Automatic enrolment

One of the key features of the Bill will be the provision for employees[3] to be enrolled automatically into a pension scheme - either personal accounts or an existing scheme run by their employer. Individuals will have the right to opt out but this process of 'auto-enrolment' is expected to result in increased take-up compared with a system which requires individuals to opt in.

European legislation - in particular the Distance Marketing Directive (DMD) - currently prevents auto-enrolment into contract-based schemes[4] such as group personal pensions (GPPs) and group stakeholder pensions (GSHPs) - accounting for at least 2.5 million current pension policies. The introduction of auto-enrolment would therefore force many employers to enrol employees into a new scheme or into personal accounts, with a strong likelihood that they would reduce contributions.

Our view

We support the introduction of auto-enrolment, which should help increase the number of people saving for their retirement. However, the problems with European legislation need to be tackled. Many pension providers currently operate 'streamlined joining' into GPPs with excellent results. Our procedures deliver take-up rates of up to 80 per cent. We believe the government should show some flexibility in its approach to allow such arrangements to continue and we're working with them to that end.

Contributions

The Bill will propose minimum employee contributions of 4 per cent on a band of earnings between roughly 5,000 and 33,500 a year (the 'personal accounts earnings band' or PAEB).[5] Employers will have to contribute at least 3 per cent on the same band, with the impact of tax relief bringing the overall contribution rate to 8 per cent. This contribution rate is aimed at providing those on median earnings of just over 23,000 a year a 'replacement rate' (the ratio of retirement income to working income) of 45 per cent[6], in line with Turner's recommendations.

The government has said that the maximum contribution to personal accounts will be 3,600 a year at 2005 prices which, adjusted for increases in earnings, will rise to around 4,800 by 2012. It has also raised the possibility of allowing for additional 'lump sum' contributions within a lifetime limit.

Our view

Auto-enrolment increases costs to employers who will have to make contributions for more of their staff. This makes it more likely that they'll close existing pensions schemes, often with higher contribution rates, or 'level down' contributions to at or near the minimum required under the new system.

Although the proposed maximum contribution rate is lower than the 5,000 put forward in the White Paper, it still has considerable potential to affect the existing pensions market and doesn't represent an effective bulwark against the threat of 'levelling down'.

Proposals to allow additional 'lump sum' contributions are misguided and risk undermining the focus on the target market even more.

Personal Accounts Delivery Authority

The Pensions Act 2007 established a Personal Accounts Delivery Authority (PADA), with advisory powers only. The new Bill will allow PADA to take on executive powers to implement personal accounts, and make provision for transition to a Personal Accounts Board (PAB) to administer the scheme after the 2012 'go-live'.

Our view

PADA needs closely defined objectives and duties and clear lines of accountability. This should include a clear duty to focus on the target market - low- and medium-earners who don't currently have access to a workplace pension - and avoid undermining existing provision. The government should make sure that personal accounts don't enjoy unfair regulatory advantages over private providers.

The legislation also needs to make it clear that personal accounts will be self-funding with no subsidy from the taxpayer or other sources. This means that charges to planholders will need to take into account both the initial and ongoing costs of the scheme and are potentially subject to variation. It needs to be made clear from the outset that this means charges could go up in the future.

 

January 2008

 

 



[1] Security in retirement: towards a new pension system (Cm 6841, DWP, May 2006), para. 1.11, p.36

[2] Implementing an integrated package of pension reforms: The Final Report of the Pensions Commission (Apr 2006)

[3] Between the age of 22 and State Pension Age, and earning more than 5,000 a year

[4] In a contract-based scheme, individual planholders own their own fund. This is in contrast to trust-based schemes, where funds are overseen by a board of trustees with fiduciary duties to act in the best interests of planholders.

[5] The PAEB will be uprated in line with earnings

[6] Personal accounts: a new way to save (Cm 6975, DWP, Dec 2006) para. 1.9, p.52. Note that the replacement rate includes state pension entitlement, which accounts for around two-thirds of this figure.