I have pleasure in responding on behalf of AEGON to your latest
publication regarding the Review of Pensions Institutions. We broadly
agree with your analysis of the current situation and see no
compelling reason for any changes to the regulatory landscape at
least in the short term.
Of the three questions you pose, we are particularly averse to any
suggestion that the FSA and tPR should be brought closer together.
While these regulators do have some areas of shared interest, they
have many more areas which do not align. We would, however, welcome
joined up thinking across regulators and government bodies when
setting rules or frameworks for aspects of pensions legislation /
regulation (such as disclosure) which apply equally to contract and
trust based pensions.
We strongly believe that any review of the roles and responsibilities
of each regulatory body should be deferred until we have greater
clarity over the detail of personal accounts; the impact they will
have on the broader pensions environment; the role different
regulators will play in regulating different aspects of personal
accounts; and any changes to broader pensions regulation resulting
from the 2012 reforms. This will allow the regulation of personal
accounts to fit with wider pensions regulation - we do not want to
see increased fragmentation of pensions regulation.
In our previous submission to your review, we included our evolving
thinking on how personal accounts should be regulated. We have taken
forward this thinking and I attach our response to the Personal
Accounts White Paper. Our views on regulation and governance are
included in Chapters 8 and 9 and in Appendix 3. While Government may
choose to class Personal Accounts as occupational pensions, in our
view they exhibit many more features of personal contract based
pensions and regulation needs to be constructed to ensure members
receive appropriate protection.
Please do not hesitate to contact me if you would like to discuss any
aspect further.
Personal accounts: a new way to save
AEGON response
20 March 2007
Personal accounts: a new way to save – AEGON’s response
1
Contents:
1. Executive summary………………………………………………….. 2
2. Introduction………………………………………………………………. 4
3. Focusing on the target market………………………………….6
4. Costs and charges……………………………………………………. 13
5. Investment……………………………………………………………….. 20
6. Supporting employers………………………………………………. 25
7. Helping people make good decisions………………………. 34
8. Governance, regulation, and information……………….. 37
9. Delivery authority…………………………………………………….. 40
Appendix one: consultation questions…………………………. 42
Appendix two: comparable rates to personal accounts. 47
Appendix three: regulation of personal accounts………… 48
ABOUT AEGON
AEGON has assets under administration of around £47 billion and employs
around 4,000 staff. AEGON is part of the AEGON Group, which is one of the
world’s largest listed insurers and has assets around Euro 360bn (£244
billion).
CONTACT
For further information, please contact Rachel Vahey, 0131 549 2719
email: rachel.vahey@aegon.co.uk
AEGON 20 March 2007
Personal accounts: a new way to save – AEGON’s response
2
1. EXECUTIVE SUMMARY
§ AEGON strongly supports the underlying objectives and principles of pensions reform
for more people in the UK to save more money to support their retirement income.
§ We have strong reservations that the Government’s approach will have a different
effect, and increased pension saving will be strongly offset from existing saving,
potentially even reducing the overall pension saving in the UK.
§ We are concerned that the proposals will harm the current thriving pensions market.
Maintaining this market is essential to achieve the overall aim of pensions reform.
Focusing on the target market:
§ The Government has set the definition of the target market too wide. It should focus
specifically on low and moderate earning employees between the ages of 22 and 55,
who do not have access to an employer’s pension scheme.
§ The Government has stated there is a risk that up to half the contributions going into
personal accounts will be switched from the existing saving market. This unacceptable
outcome would fail the original intention of pensions reform.
§ The proposed contribution cap of £5,000 is inappropriate, and has the ability to
destabilise the existing pension market. We believe it should be set at £3,000, a level
more appropriate to the target market (including for the first year).
Costs and charges:
§ The delivery authority should set the charges level. If the Government does this it
could result in constraining the delivery authority to concentrate on costs at the
expense of other responsibilities.
§ Personal accounts should not be subsidised by the taxpayer to achieve an artificially
lower charge, otherwise it creates disparity between the current pensions market and
personal accounts.
§ Charges are not as important as employer contributions, tax relief or investment
performance in determining final retirement income.
§ Today’s pension charges offer value for money and are highly competitive.
§ The charging structure for personal accounts should combine a modest fundrelated
charge with a contributionrelated element. This will reflect more closely the timing of
the underlying costs, and serve as an incentive to remain opted in.
Investment options:
§ Investment options need to be very simple and easily communicated to customers.
§ A default fund should be passively managed and have a very simple split between
equities and bonds. It should include lifestyling to protect the investments of those
nearer to retirement.
§ AEGON still believes there is merit in only offering one fund option. If the Government
requires an element of choice, then we recommend offering only five nonbranded
AEGON 20 March 2007
Personal accounts: a new way to save – AEGON’s response
3
funds (including a default fund). Additional fund choice of ethical and religious funds
could potentially be added, probably for a higher fund charge.
Supporting employers:
§ The contribution rate for exempt schemes should be set as an employer contribution
of 3% of basic salary. This should include individual as well as group arrangements.
§ The Government should ensure the provisions of the Distance Marketing Directive
(DMD) should be interpreted to not apply to any contractbased pension arrangement
where there is an employer contribution of at least 3% of band earnings. This will
allow contractbased arrangements to employ autoenrolment.
§ The Government should be aware of the choices employers have to make and support
employers in maintaining and opening up current pension arrangements. It should
work with the industry to prevent levelling down.
§ The delivery authority should design the personal accounts centralised unit with the
aim of controlling administration burdens for employers.
Helping people make good decisions:
§ The Government has accepted there are some individuals for whom personal accounts
will not be a suitable vehicle for longterm saving. If the principle of autoenrolment is
to continue to be widely acceptable, the Government needs to make clear that auto
enrolment is for the ‘greater good’ of the UK nation, and is a national rather than an
individual issue.
§ In the absence of regulated advice, generic advice is key in helping people make
financial planning decisions.
Governance, regulation and information:
§ We question the decision to define personal accounts as an occupational pension
scheme, when they patently share the characteristics of a personal pension.
§ We recommend the regulation of all employersponsored pensions is set at the same
level. Reduced regulation for personal accounts would distort competition and
introduce regulatory bias into the marketplace.
§ Only money not attracting a matching employer contribution should be subject to FSA
regulation, regardless of the pension vehicle it is paid into.
§ Different regulators will need to regulate different elements of personal accounts, and
their place within the broader pensions landscape.
The delivery authority:
§ The delivery authority and Personal Accounts Board’s (PAB) powers should be limited
to personal accounts. However, both should have a responsibility to refrain from
actions likely to damage the continuation of a thriving market outside personal
accounts, including ensuring a level regulatory playing field exists.
§ The Government should take on the responsibility for setting the overall framework
and the nonpersonal accounts aspects of pensions reform.
AEGON 20 March 2007
Personal accounts: a new way to save – AEGON’s response
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2. INTRODUCTION
AEGON welcomes the White Paper ‘Personal accounts: a new way to save’. We strongly
support the underlying objectives and principles of pensions reform – for more people in
the UK to save more money to support their retirement income.
However, we have strong concerns about how Government intends to meet these
objectives, and strong reservations that instead of achieving the aim of pensions
reform, the Government’s approach will instead have a different effect to the one
intended. This could mean that although more people in the UK save towards their
retirement specifically in a personal account, this saving could be strongly offset from
existing saving, or even by reducing the current level of pensions saving.
This does not achieve the overall aim of pensions reform, and on an individual level, will
mean a significant number of people who are currently on target for a decent level of
income in retirement, may end up with a level significantly worse.
If the Government is going to adopt an approach of ‘targeted intervention’, then it
needs to be very clear about the group of people it is targeting. We cannot have
‘blurring of edges’ – all intervention must be directed at this group and policy designed
specifically with this group in mind.
The pensions market today offers a ‘good deal’ to those who are saving towards their
retirement. Harming this market through the law of unintended consequences will not
benefit the UK as a whole.
The Government has within its powers the ability to design a competently targeted
approach, without harming the good pension provision that exists in the market today.
We strongly urge it to be aware of this issue and to design its policy accordingly.
2.1. PRESERVING A THRIVING MARKET
2.2.1 The importance of a thriving market
The aim of pensions reform is to generally increase the scope and level of pension
saving, so that more people are saving more money, and so allow more people to have
an adequate income in retirement.
Ideally, we believe, for individuals, the best way to achieve this is to encourage
employers to maintain (or set up) good workbased pension arrangements and to open
them up to all employees through autoenrolment. However, where employers do not
have workbased pension arrangements, and realistically can’t be persuaded to set one
up, personal accounts should be developed to give employees a new workbased option.
It’s essential to sustain a thriving private pensions market to encourage employers to
maintain pension provision, as well as encourage people to save. This aim is as relevant
in the years before personal accounts are introduced, as in the years following. ABI
research shows that by delaying saving until 2012, a 25yearold could see their
pension fund at retirement reduced by more than £36,000 in real terms, almost 20% of
total fund.
AEGON 20 March 2007
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A thriving private pensions market can also help encourage people to save above the
personal account levels, which when taken together with State benefits, will secure
them a retirement income which will go some way to meeting the levels they hope for.
It will also help those who fall outside the personal accounts target market to save,
including the important group of 3.7m selfemployed people in the UK. The self
employed will be unaffected by the introduction of autoenrolment and cannot benefit
from a mandatory employer 3% contribution. They are also unable to participate in the
State Second Pension (S2P).
Financial capability
Improved financial capability can be instrumental in achieving and sustaining a thriving
market in the future. We are therefore pleased to be working with HMT to help set a
longterm strategy for financial capability within its ten year plan, and will support it
wherever we can, so people can understand their financial needs and make better
provision.
However, it’s worth noting that the effects of improved financial capability may take
some time to emerge and may not be obvious by 2012. What will be different by that
date, however, is that we may see a change in culture and individuals may be more
involved with saving for their future. Generic advice will be critical here, and has the
potential to kickstart the savings revolution.
How advice is treated under benefitinkind rules
Giving their employees access to financial advice within the workplace is one way
employers can enhance their employees’ final income in retirement, and we are pleased
to note the increasing importance DWP is placing on all types of advice.
However, currently, if the cost of financial advice is above £150 a year, the excess is
treated under the benefitinkind rules. Limiting this benefit at this level often presents
a barrier to employers offering this provision to employees. They want to help
employees make the right decision, but do not wish to be seen as adding to employees’
tax bills.
To help remove this barrier, we strongly suggest the DWP and HMT reconsider these
rules, so that advice given in the workplace is not treated as a benefitinkind. This
would help employers to encourage their employees who are enrolled into existing
schemes not to opt out, so meeting the objectives of pensions reform. We suggest this
barrier should be removed as soon as possible ahead of 2012 to fully encourage
employers and employees.
AEGON 20 March 2007
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3. FOCUSING ON THE TARGET
MARKET
3.1 Target market of personal accounts
We believe to meet the Government’s objective of personal accounts complementing
rather than competing against the existing pensions market, it’s important to define the
target market for personal accounts.
1
The Government defines the target market for personal accounts as:
‘People aged between 22 and State Pension Age, who earn over
approximately £5,000 per annum, and who either do not have access
to a workbased pension scheme with an employer contribution of at
least 3%, or who do not participate in one if offered.’
We strongly believe the target market for personal accounts differs significantly from
the above definition because:
1. It should only include employees. Personal accounts will be distributed through the
workplace through autoenrolment, and although others may choose to join, the
target market is clearly only employees.
2. It includes only those who are low and moderate earners. Higher earning
employees, say those earning above £30,000, will have, in general, more access to
retirement savings products and advice. They will also more likely be already saving
towards their retirement income.
3. It should only include those whose employer does not offer an exempt workbased
pension scheme. Those who are offered membership, but have chosen not to
participate in an employer arrangement fall outside target market for personal
accounts.
4. There should be a lower maximum age of 55. Research by the Pension Policy
Institute (PPI) has shown that those being autoenrolled at an older age fall into a
medium risk group of their savings being eroded by meanstesting. (Section 7.1.2)
The definition for personal accounts target market should therefore be:
Lower and moderateearning employees aged between 22 and age 55, who
earn over approximately £5,000 per annum, and who do not have access to a
workbased pension scheme with an employer contribution of at least 3% of
basic salary.
1
The Regulatory Impact Assessment for ‘Personal accounts; a new way to save’ (page
57)
AEGON 20 March 2007
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7
The objective of personal accounts is to promote saving among this group of employees.
Therefore, the Government should design personal accounts with that specific group in
mind, and not as a likely prompt to recycle existing retirement savings.
3.1.1 Self employed and carers
The Government has stated that the selfemployed and nonearners will be eligible to
join personal accounts. These groups are not currently eligible to join an occupational
scheme, which raises immediate legislative issues.
While eligible to join, there will be no autoenrolment, so there is no new dynamic to
encourage greater takeup. This implies that the distribution dynamics and the role of
advice are unchanged.
Furthermore, as there will be no 3% employer contribution, the arguments Government
have used around how, despite means tested benefits, it ‘pays to save’, do not apply to
these groups. This increases the need for them to be properly advised (whether full
regulated advice or generic advice which takes into account their employment status).
Similar arguments could be applied to situations where an employee is making an
additional contribution (either regular or lump sum) which is not matched by one from
the employer (see section 8.2.1).
As personal accounts are designed to exclude any allowance for regulated advice, we
believe the selfemployed and nonearners should not be part of the target group for
this product. This is consistent with how providers would set target markets for
regulated products under Treating Customers Fairly (TCF) – if we recognise that
customers will benefit from receiving advice, we would not offer that product on a direct
offer basis.
3.2 OFFSET FROM CURRENT SAVINGS
We are gravely concerned paragraph 39 of the Executive Summary of the White Paper
estimates personal account members will save £8bn, but of which only 60% is new
saving. This means 40% will be redirected current saving, a significant proportion of
which will be from current pension plans.
We believe that this is an unacceptable and potentially disastrous outcome, which fails
the Government’s key test of personal accounts complementing not competing against
existing pension provision.
Simply redirecting current saving will not achieve the main objective of pensions
reform to increase the level of pension saving. Instead it is tacit acceptance of levelling
down and the effective destruction of a vibrant section of the employersponsored
savings market.
We believe, instead, the percentage target for new saving into personal accounts should
be set much higher than this level, and we would be happy to work with the
Government to set this new rate and the means to achieve it.
3.2.1 What is the basis of the 60% new money assumption?
We are further concerned that the basis of the 60% assumption is flawed and that this
may well be a significant overestimate of the new money saved. We fear this because:
AEGON 20 March 2007
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8
2
1. The author of the research on which this assumption is based says ‘there is no
direct international or UK precedents for the NPSS to guide the assumptions here’.
The data from the UK and US consistently suggest much lower levels of new money
based on experience with 401k and IRAs, and for TESSAs and ISAs. The UK
experience shows a level of new money of 15%.
2. The 60% assumption is based on another assumption that the target population has
3
relatively low average levels of saving. Data from Deloitte (2002) showed that the
average level of saving across this group was £1,600 each year – just under 9% of
average earned income. Despite being regarded as largely unpensioned, around half
this group – over 4 million people claimed to be making pension contributions at
an average level of just under £1,000 each year or 5% of earned income. We fear
that, if autoenrolled into personal accounts they will stop their other pension
contributions and settle at the default level of contributions, reducing their savings
by offsetting them with the employer contribution. Adding employer contributions to
their existing arrangements is, by inertia, far more likely to result in a net addition
to their pension saving.
3. The 60% assumption is based on yet another assumption that there will be
‘reasonably low’ levels of optout with autoenrolment. Figures of 10% or less are
cited from previous experience. The Government has accepted much higher levels of
4
optout (between 20% and 50% ) on grounds of affordability.
In other words we strongly suspect that those who already save, will redirect
saving into personal accounts, and those who don’t are most likely to optout,
rather than start saving.
3.2.2 What should be done to address the offset issue?
We believe the Government should:
1. Conduct a much more detailed datadriven analysis of how much the target market
currently saves.
2. Require the regulatory impact assessment to take full account of the realistic levels
of ‘offset’ and the costs incurred by substitutive rather than fresh saving. Such costs
would include the wasted cost of setting up personal accounts to duplicate existing
arrangements, the costs to such savers arising from early termination of
arrangements and to the savings industry writing off expected revenue by further
deteriorating persistency.
3. Design the exemption test more specifically to enhance, rather than merely switch,
pension and other saving already actively taking place in the target group. So
employers offering to pay 3% into any pension vehicle will not have to pay into
personal accounts, and this contribution does not have to be dependent upon the
employee also paying into the same pension vehicle. This maximises the chance that
the employer contribution is additional to current saving.
2
John Hawksworth, PricewaterhouseCoopers, 2006, “Review of research relevant to
assessing the impact of the proposed National Pensions Savings Scheme on household
saving”, DWP Research Report No373
3
Deloitte: Wealth and Portfolio Choice, 2002.
4
Hansard 5 March 2007 : Column 1738W
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3.3 TRANSFERS
We welcome the decision not to allow transfers in or out of personal accounts in the first
few years. We believe this will keep the focus on the target market, and help to mitigate
planning blight, reduce costs and the need for advice. By definition only those who have
built up savings already could transfer into personal accounts, in other words those
falling outside the target market for personal accounts. The more affluent individuals
and better advised would have benefited.
The ability to transfer into personal accounts would have also disrupted both the
economies of delivering personal accounts and those of the wider pensions market.
We agree in principle with the proposal to review this decision.
We encourage the DWP to bear in mind the implications for personal accounts when
negotiating the proposed European Portability of Pensions Directive. In particular, we
are concerned about any legislation which would make it mandatory to allow transfers in
and out of personal accounts.
3.4 YEARLY CONTRIBUTION LIMIT
We agree with the decision to have a contribution limit for personal accounts. We
believe this will minimise the potential for individuals to commit significant sums to a
pension without seeking regulated advice. This is important in view of the longterm
nature of retirement savings. But we firmly believe maintaining a thriving pensions
market alongside personal accounts will be beneficial to most people as it will provide
diversity, specialised features, individual regulated advice, and encouragement to
increase contributions to adequate levels.
We believe that a proposed contribution cap of £5,000 is inappropriate for the target
market.
3.4.1 Targeting replacement income rates
The White Paper states this proposal has been calculated based on the level a median
earner needs to pay to achieve a retirement income equal to two thirds their final
earnings. However, personal accounts are explicitly aimed at the low to moderate
earners without access to an employer’s good pension scheme.
5
Furthermore, the White Paper sets the contribution rate of 8% of band earnings. In line
with the Pensions Commission recommendation this would achieve a replacement ratio
6
of preretirement income for a median earner of about 45%. The Pensions Commission
however outlines that 30% of that will come from State benefits (assuming pensions
reform is accepted) and only 15% from NPSS. This emphasises that the vast majority of
a replacement income for the target group is dependent on State benefits, rather than
personal account income.
5
‘Personal accounts: a new way to save’ (paragraph 1.29)
6
Pensions Commission ‘A New Pension Settlement for the TwentyFirst Century’
November 2005 (page 19)
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The table below shows if a moderate earner contributed £5,000 for his working life, he
could expect a combined income from State and personal accounts equivalent to an
89% replacement ratio. For a low earner the replacement ratio increases to 173%. This
clearly shows that for the target market the proposed contribution cap of £5,000 is too
high. It also begs the question that if an individual is contributing such a high rate,
should they not be seeking regulated financial advice.
Instead, we believe £3,000, as recommended the Pension Commission, is a far more
balanced contribution cap to set, and would still allow the target market to achieve the
aim of two thirds replacement income ratio.
Table showing replacement ratio for a combined income from the State and
personal accounts for various incomes and contribution rates
Income
Yearly contribution
£12,000 £23,000 £32,000
8% of band earnings 73% 47% 38%
£3,000 128% 65% 45%
£5,000 173% 89% 62%
Basis: term 43 years (age 25 to 68); price inflation of 2.87%; investment growth of 3.5% above
price inflation; earnings growth of 2% above earnings growth; annual management charge of
0.6%; annuity basis – male, single life, five year guarantee, and inflationlinked escalation.
3.4.2 Average contribution rates
Another justification for setting the contribution limit at £5,000 arises from Government
7
analysis of average pension contributions.
We believe reliance on this analysis is flawed and inappropriate, because:
1. the analysis looks at those with existing pension provision, rather than the DWP’s
target market of low and moderate earners not saving in a company pension
scheme. It is very likely that those who don’t actively make the decision to engage
and to save in a pension will be prepared to save as much as those who did make
that decision.
2. those in pension employment earning above £30,000 have been included in the
analysis and this group will include some very high earners. We believe this distorts
the average contribution, and includes a significant number of people who manifestly
fall outside the target group of personal accounts.
Evidence from AEGON’s book of defined contribution group business shows that, in
general, those on higher earnings pay higher levels of contributions. Based on AEGON’s
7
Regulatory Impact Assessment to ‘Personal accounts: a new way to save’ (section
5.20 and 5.21)
AEGON 20 March 2007
Personal accounts: a new way to save – AEGON’s response
11
data for group personal pension and group stakeholder business, the average total
contribution paid by those earning in the band £30,000£35,000 is around one half of
that paid by those earning in the band ‘£30,000 and over’. This shows the extent to
which figures can be distorted.
We believe that setting a contribution cap at £5,000 has the potential to attract those
outside the target market for personal accounts, and therefore to destabilise the
existing market.
3.5 First year’s contribution limit
We are also concerned about setting the limit in the first year at £10,000, and believe
this is unnecessary. Although we accept setting a higher limit will give people the
opportunity to notionally ‘earmark’ regular savings for personal accounts in the run up
to 2012, we believe that in reality very few of the target market for personal accounts
will be able to afford to save anything approaching the £10,000 limit.
Instead, there is the danger this limit will attract the savings of highearning individuals
looking to exploit an opportunity. Although, this would increase the level of savings
within personal accounts, it’s highly unlikely these contributions would come from the
target market.
Even if people did save in advance of 2012, we believe those additional contributions
would easily fit within the normal contribution limit for personal accounts.
We, therefore, have serious concerns with this proposal. In particular:
1. Having a higher limit for the first year will immediately complicate the way
contributions are monitored for personal accounts.
2. The higher year one limit may be used to discourage contributions in the runup to
2012 to existing forms of pension.
3. Introducing a higher limit makes the issue of people receiving regulated advice more
important to make sure they invest in their best interests.
4. This approach may also present timing issues. If an individual transfers £10,000 to
personal account on April 2012, there will be no ‘room’ for the 8% of salary
contribution during the remainder of the 2012/2013 year.
Instead we believe the contribution cap should be set at the same limit for all years.
3.6 Other contributions
There will be some individuals for whom personal accounts are not best for their needs.
And there will be others who wish to pay amounts above the personal account
contribution cap. Many of these individuals will seek regulated advice. We are deeply
concerned by the recent decision by the FSA to retain its ‘RU64’ rule and by the
references made to personal accounts.
Personal accounts are clearly designed to be bought without regulated advice, and their
charge will be set accordingly. As such, it would be wholly inappropriate to set a price
benchmark for other advised pensions products which related to the charge for personal
accounts. As has been seen already, the need under the current RU64 rule for advisers
to justify why an alternative pension is at least as suitable as a stakeholder pension, has
led to disproportionate focus on charge comparisons and has meant moderate earners
simply do not have access to individual pensions advice.
AEGON 20 March 2007
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We strongly believe that retaining a vibrant and diverse pensions market alongside
personal accounts is to the benefit of all parties. To ensure this is achievable, it is
imperative that there is no regulatory requirement for an adviser to justify charging
above the personal account level. We accept, however, that an adviser should explain to
any employee pensions client with no current provision that joining a personal account
will provide a 3% employer contribution which might not be available under all
alternative pension vehicles.
3.7 Monitoring contribution caps
Consideration should also be given to how to monitor contribution caps. We believe that
this responsibility should not be passed to the employer. Instead, the centralised unit
should be responsible for monitoring when the contributions have exceed the cap,
refunding excess contributions, and stopping further payments including informing
customers and employers.
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Personal accounts: a new way to save – AEGON’s response
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4. COSTS AND CHARGES
4.1 RESPONSIBILITY FOR SETTING CHARGES FOR PERSONAL ACCOUNTS
AEGON strongly believes charges for personal accounts should be set on a realistic and
reasonable basis. They should be based on the underlying costs of carrying out the
various functions required, and should not be artificially or prematurely imposed by
Government.
Instead, the delivery authority should be given powers to set a charge level based on
the final design of personal accounts (both product and system), and as a result of a
commercial tendering process. The delivery authority and PAB should also have a role in
reviewing this over time.
If the Government sets the charge level it could result in constraining the delivery
authority to mistakenly concentrate on cost at the expense of its other responsibilities.
Furthermore, we strongly believe the Government should not set aspirational targets at
such an early stage before the exact way the model will work has been agreed, the
contracts awarded and the level, type and frequency of communication agreed upon.
While we believe the level of charges should be a direct function of costs, we suggest
the Government has a role in setting a framework for the shape of the charging
structure for personal accounts. In doing so, it will be able to take a view on the level of
crosssubsidies that should exist within personal accounts, bearing in mind the target
market.
4.2 TAXPAYERS’ SUBSIDIES
We strongly believe personal accounts must not be subsidised by the taxpayer to
achieve an artificially lower charge. Existing pensions and personal accounts will
compete against each other, and it is paramount that they do so on an equal footing.
State subsidies of any kind would go against the fundamental principle that the existing
pensions market must be able to flourish in the new environment.
To achieve this equal footing the delivery authority should be given an obligation not to
create a system subsidised by the taxpayer. Instead, costs should be recovered through
charges made to personal account holders within a commercially reasonable timeframe.
Provision should also be made for the risk that costs are not recouped as planned.
It is important to remember that personal accounts will face many of the same
pressures as the current pension market. There is no ‘magical’ economic advantage.
The great benefits from pensions reform are autoenrolment and a compulsory
employer contribution, both of which will be available to nonpersonal account pensions
as well. In this case, the current pensions market should be allowed to maximise its size
and be allowed to compete fairly. Government messages should not be misleading in
this regard.
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4.3 CHARGES AND THEIR RELATION TO COSTS
8
The Pension Commission outlined the costs of personal accounts as:
§ An initial cost of £500m to set up the infrastructure for personal accounts.
§ An additional £90 startup cost per individual, to increase with price inflation.
§ Ongoing costs of £25 a year for ‘active’ accounts, and £20 for those that had lapsed.
§ Fund management costs of 0.08% of assets under management.
The delivery authority and Government will need to review these assumptions as the
details of the final design of personal accounts become clearer, to influence their
decision about the shape and level of charges.
We believe the starting point for personal accounts charging shape should be one which
minimises risks and mirrors the incidence and shape of the underlying costs the
personal accounts scheme will incur, rather than a flat rate annual management charge.
Based on the Pensions Commission’s analysis, this suggests a charging shape of a
modest annual management charge, a oneoff upfront cash fee for each member, and a
yearly cash deduction for each policy.
Such a shape has the following benefits:
§ It allows costs to be recouped through charges in a way that closely mirrors the
timing of those costs.
§ It makes it easier to adjust charges if one element of cost proves more or less
expensive than assumed.
§ It minimises the risks for those who invest the financial capital from cost overruns or
where volume is lower than expected.
However, the shape is unlikely to appeal to customers. For this reason, we believe some
departure from the ‘pure’ starting point is justified. But any departure will involve cross
subsidies between different groups of members and is also likely to generate a
requirement for capital, which in turn needs to be paid for. We expand on this in section
4.5.1 below.
4.4 CURRENT PENSION CHARGES
A key strand of the Government’s proposals for personal accounts is to deliver a low
cost product.
We have concerns with this overriding statement for three key reasons:
1. It overemphasises the role that charges play in determining people’s income in
retirement. Section 4.4.1 below clearly shows that charges are not the most
important factor in achieving a decent level of income in retirement.
8
Pensions Commission ‘A New Pension Settlement for the TwentyFirst Century’
November 2005
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2. It implies people are more likely to buy or engage with a pensions product if charges
are low. Stakeholder pensions have provided little evidence of this.
3. It implies pension charges are currently set at an artificially high level.
These points are discussed below.
4.4.1 The context of charges in retirement planning
While low charges will clearly help in maximising available funds at retirement for those
who choose to save, we strongly believe that other factors – such as the proposed state
pension reforms and the proposed employer contributions – will have a greater impact
on the retirement income a personal account saver can expect.
The internal rate of return (IRR)
Recent PPI research 9 examined factors affecting the ‘internal rate of return’ (IRR). This
is effectively the nominal yearly return the saver receives on their individual
contributions, after allowing for effect of tax relief, employer contributions, investment
returns, charges, income tax and meanstested benefits. It is the same as the ‘effective
rate of return’ used by the Pensions Commission to investigate the expected returns
from savings in the NPSS.
The PPI research shows that the IRR for a medianearning man with a full NI record
aged 25 in 2012 is 5.9%. Box 1 below clearly demonstrates that state pension reform
and employer contributions have a much bigger effect on a person’s end income than
lower charges.
Box1: Factors affecting the IRR:
State pension reform – the PPI showed that if state pension were not reformed, but
personal accounts were introduced, the IRR would be significantly lower at 4.4% (a fall
of 1.5%)
Employer contributions – the PPI showed that the impact of an employer contribution
on the IRR was an increase of 1.6%
Charges – the PPI showed the impact of a 0.5% charge (compared to an annual
management charge of 1.5% for first ten years, and 1% thereafter) was an increase of
only 0.4%
Potential payback
Analysing the potential payback from saving within personal accounts also demonstrates
the place charges play in the overall value of savings. Figure 6b in the White Paper
shows the potential payback from £1 contribution for a male medianearner aged 25 in
2012 to be £2.55.
Box 2 shows other factors are of more significance when considering the potential
payback.
9
Pension Policy Institute: ‘Are personal accounts suitable for all?’ (November 2006)
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Box 2: Factors affecting the potential payback:
Charges of 0.5% a year lead to a deduction of £0.43
Investment growth gives an addition of £1.82
Employer contributions give an addition of £0.77
The effect of increasing the charge by 0.2%
Work recently carried out by the PPI for AEGON compared the effect of a 0.7% a year
charge on its own figures for the potential paybacks for various examples, with the aim
of demonstrating sensitivity.
The results show that increasing charges to 0.7% will have the effect, for this example,
of:
§ reducing the IRR to 5.8% (from 5.9%); and
§ reducing the potential payback to £2.61 (from £2.73)
This sensitivity shows the relatively minor effect this order of change to the charge has
on the IRR. And we urge the Government to carefully consider the other benefits a small
extra charge might deliver, for example in terms of takeup, communications and less
administration for employers.
4.4.2 What discourages people from saving?
There is substantial evidence examining what discourages people from saving within a
pension, or stopping saving once they have begun. None points to high charges being a
significant factor is this area.
10
Indeed, recent research from Scottish Widows shows for 43% of people the biggest
reason they had never saved into a pension is that ‘they had nothing to spare after the
11
cost of living’. This is mirrored by ABI research showing 53% of people said they had
no spare money in reply to why they had not taken out a pension.
Although both these pieces of research show generally why people do not save,
12
research by Marketing Sciences show that only 7% of people believed the perceived
disadvantage of pensions over other savings was high charges.
Other points to bring out:
§ Charges are not the only consideration savers take into account. Just as people will
pay more for a higher specification car, investors are willing to pay more to access
specialist markets and funds, and higher profile managers with proven track records.
§ When comparing products, the customer will still save the same amount (for example
£100 a month) regardless of the charges of the product. The charges will instead
10
Scottish Widows’ UK Pensions Report 2005
11
The State of the Nation’s Savings, 2006/2007
12
Marketing Sciences ‘The Retirement Planning Monitor 2006’
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influence how much is deducted from the return. This is different to buying consumer
goods – where charges will result in a tangible lower price and more disposable
income for the customer.
4.4.3 The level of pension charges today
Chapter 4 of the White Paper emphasises the need for low charges, and Box 4a aims to
show how higher charges can reduce drastically the retirement income for a pension
saver.
We strongly believe Box 4a does not paint a true representation of the effect of pension
charges today, and instead portrays the current pensions market in a misleading light.
This is because the example shows a 1.5% annual management charge applying over
43 years. This is largely unrepresentative of pension charges today. Most pension
charges, especially for the group market, are set around a level of a 1% annual
management charge, including commission, and closer to 0.5% or 0.6% annual
management charge if no commission is taken (‘clean’ terms).
As well as using inaccurate market figures, the example is drawing an unfair
comparison. A charge close to the level in Box 4a includes the administration and fund
management costs, as well as the costs for regulated advice. Under the personal
accounts model there is no advice and therefore no cost. We anticipate that personal
accounts holders will receive generic advice, but as yet it is unclear how this will be
financed.
Pension charges today, in general, represent good value for the pension customer, and
are set at a highly competitive rate. Often they include costs for regulated advice, and it
is important that the discussion on charges in personal accounts recognises this, and
the fact the customer is paying for a service received. On a likeforlike basis (‘clean’
terms) current pension charges are set at a very similar level to that being talked about
for personal accounts. However, current pension charges also pay for provider solvency,
complaints handling and redress systems. It’s currently unclear whether these will exist
under personal accounts, and if so, how they will be paid for.
However, because a significant proportion of costs arise at the start of a contract, a
level annual management charge takes a substantial period to recoup costs. For this
reason, many commentators view the current charging structure when compared to
current costs as unsustainable.
4.5 CHARGES AND THE PERSONAL ACCOUNTS MODEL
4.5.1 Working with contractors
Personal accounts will be run on a centralised basis, and each of those who are
contracted to provide a service will receive an agreed payment (the level and shape of
those payments may vary amongst different contractors). The delivery authority should
design the remuneration packages for these contractors to encourage high quality and
costeffective administration and good investment performance.
The White Paper outlines there will be several different contractors all of whom will incur
costs driven by different parameters.
§ Delivery authority – will have to pay staff, professional advisers, and run
overheads. There will also be considerable governance costs, including, potentially,
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solvency margins. These are largely fixed costs and not related to contributions
received, funds or number of members.
§ Clearing house (function) costs are largely a function of the number of
contributions received once set up, but the setup costs could be substantial. The
clearing house may also incur costs if responsible for handling employer enquiries.
§ Fund managers tend to be remunerated as a percentage of funds under
management, although a number of underlying factors will drive their costs.
§ Administrators – costs of keeping records of individual entitlements (including
contributions received, charges deducted, investment values, personal details and
rights at retirement). Number and turnover of members, level of contributions
received and the extent of interaction with individual members and employers will
drive these costs.
Wherever the incidence of charges diverges from the incidence of costs, there is a
mismatch, and where costs exceed charges this needs to be financed. We recommend
the delivery authority seeks to remunerate each contractor in a way broadly mirroring
the incidence of their costs. This will avoid the need for contractors to raise capital to
cover shortfalls. It will also make it easier for the delivery authority to monitor what is
an acceptable level of charge and to consider reducing it if cost efficiencies emerge over
time or increasing it if it becomes uneconomic for contractors to continue to provide
their service.
If this approach is adopted, the delivery authority will bear the principal mismatch risk
between charges which can be deducted from the scheme and costs it incurs through
remunerating contractors. The cost of capital to finance this mismatch needs to be
factored into the overall charge. It should not be covered by a hidden taxpayer subsidy.
Arguably, the delivery authority should also be subject to similar solvency provisions as
other firms such as life offices, which bear longterm financing risks.
4.5.2 Setting the right shape
As outlined above (section 4.3), the ‘purest’ charge shape to recoup costs is a modest
annual management charge, a oneoff upfront cash fee for each member, and a yearly
cash deduction for each policy.
Against this background, we need to determine a shape with customers’ needs and
wishes in mind, but one that will also recoup costs in a way that mirrors as closely as
we can the way they occur.
We therefore recommend that the charging structure shape is a modest
element of fund related charge and a contract or contributionrelated charge.
This is likely to come closest to recouping costs on a similar basis to the way
they arise, while also appearing attractive to customers.
4.5.3 Reviewing charges
Just as we believe the charges for personal accounts in 2012 should be based on an
assessment of underlying costs, so do we believe future costs should drive future
charges. Any review needs to wait until any initial capital has been repaid. All analyses
of charges make assumptions about costs.
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One key variable that requires careful consideration is actual takeup levels and
persistency. These are very large upfront and fixed costs, and if takeup and persistency
are less positive than assumed, there could be a major impact not just on the viability
of reducing charges in future, but of being able to recoup initial outlays.
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5. INVESTMENT OPTIONS
5.1 Designing investment options
AEGON agrees with the Government’s basic assertions that investment under personal
accounts needs to be very simple for customers to both understand and to
communicate.
13
The Government points to evidence that complexity will put off the target market for
personal accounts, and may lead to them opting out of personal accounts altogether.
It is essential that a simple, clear, investment strategy is designed with the target
market in mind (low to medium earning employees who do not have access to an
employer pension contribution).
5.2 Default funds
The design of the default investment fund for personal accounts is particularly pertinent;
evidence shows us the vast majority of the personal account holders will either ‘default’
into the fund (in other words not make a choice) or choose to stay in the default fund.
We suggest that the default fund:
§ is passive rather than active;
§ has a very simple structure split between equities and bonds (for example on a 70:30
basis);
§ only invests in UK equities – investing in worldwide equities involves a currency risk,
and exposure to world markets can be gained through the international makeup of
many of the FTSE100 companies;
§ does not invest in property – although liquidity is not an issue for a fund of this size,
it may be taxing to find assets to invest in for the size of contribution expected in the
personal account default fund without involving ‘political’ pressures;
§ adopts a simple approach, and recognises the ‘loss averse’ risk profile of the target
market, whilst guarding against ‘excessive conservatism’;
§ has a lifestyling profile, where assets move gradually into fixed interest and gilts, over
a five year period before an individual’s retirement age.
The proposed structure is designed to provide longterm growth that is ahead of
inflation, while at the same time offering some diversification. The 70:30 split would
likely suit an investor that could be described as having a balanced or average risk
tolerance.
The delivery authority may also want to consider designing the default fund on a
'smoothed growth fund' to remove some of the shortterm volatility as a further level of
protection for members.
13
Regulatory Impact Assessment ‘Personal accounts: a new way to save’ (paragraph
2.27)
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5.3 Other funds
14
As previously stated AEGON believes there would be merit in removing investment
choice, and only allowing the target market to invest in the default fund. The delivery
authority has the power, whilst designing the default fund, to make sure diversity of
investment with different establishments is achieved, and so spreading risk.
If people want to choose from a wider selection of funds, then it makes sense that this
is accompanied by advice from a qualified adviser, to make sure they make the best
decision for their future. People may be free to join another type of pension plan (such
as a personal pension) as long as their employer pays a 3% contribution into any
pension vehicle.
Some people may want to switch into a cash fund in the approach to retirement to
maintain the capital value of the fund as they intend to take it all as cash (under the
triviality rules). In this scenario, this investment switch should be offered as a product
feature, and cash should not be offered as another investment choice. This makes sure
people don’t switch into cash funds through reasons of ‘reckless conservatism’.
Alternative
However, we realise there are other views on this area, and if the Government wishes
to offer an element of choice then it is essential that this fund choice should be focused
and kept minimal.
The funds should also be named and described in a way that allows customers to easily
understand where it invests and what it aims to achieve.
We suggest the following range:
§ Cash fund – this may be used by those customers who may want to move into a
capital protection fund at any point (possibly before retirement if able to take funds
as a lump sum under trivial commutation).
§ Fixed interest fund – indices around corporate bonds and government securities.
This may be used by customers wishing to make their own asset allocation choices
rather than assume the default split between equities and bonds, and for customers
wishing to make choices about moving to more suitable environment before
annuitisation.
§ A UK growth – to offer an alternative to the default for customers willing to take
more risk. This fund should be invested in UK equities on a passive basis
§ A worldwide growth fund to offer an alternative to the default for customers
willing to take more risk. This fund should be invested 50% UK equities and 50%
overseas equities on a passive basis.
5.3.1 Small range
We believe the choice of funds should be minimal, and have suggested five funds
15
(including a default fund). The Government points to a case where 65% of members
14
AEGON’s response to ‘Security in retirement: towards a new pensions system’ (page
19)
15
Regulatory Impact Assessment ‘Personal accounts: a new way to save’ (paragraph
2.28)
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of a specific occupational pension scheme were satisfied with a choice of only three
main fund options. Only 9% wanted more choice. This reflects AEGON’s own experience
(see box overleaf).
5.3.2 Ethical fund investment
We understand that many people may find the idea of social, environment and ethical
(SEE) investment appealing, however, we advise against including this element within
the makeup of the default fund. Instead, we suggest the delivery authority considers
whether to offer this as a separate investment choice within the shortlist of funds
described above, possibly with a higher fund management charge.
There are many different levels of SEE investment, and the current market solution is to
offer different ‘shades of green’. ‘Darker green’ funds will operate on an ‘exclusion
process’ and will not invest in companies who are involved in any way in particular
areas which contravene the SEE principles. Whereas ‘lighter green’ funds will include
companies who, as part of their commercial operations, have a positive attitude to
making changes to their corporate strategy, and will engage with these companies to do
so.
The delivery authority (and later the PAB) will have to consider which level of ‘green’ to
opt for, and may decide to take a broadly popular stance (in other words, would it meet
concerns of most people) rather than a ‘dark green’ solution.
Choosing an ethical fund would not fall neatly into the simple asset split required for the
default fund (as described above). It would also require extra governance, and so lead
to extra costs. We therefore suggest that it could be offered as an additional fund for an
additional charge.
5.3.3 Religious funds
AEGON agrees some people may want investment funds designed with specific religious
principles in mind. This area, however, is complex, and the delivery authority may
struggle to decide on a mandate that meets everyone’s concerns. Again, this may mean
a higher governance and corresponding higher charge.
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Box 3: Example of AEGON’s Investment Experience
This is a large defined contribution occupational pension scheme with around 5,000
members and around £170m assets.
The trustees operate a ‘default investment strategy’ where they pick a small range of
funds. Members can choose to invest in other funds (offered by AEGON), but to do so
they have to formally opt out by signing a form.
The chart below shows how many funds members have chosen to invest in. Only 3.3%
have chosen to invest in more than one fund. Over 90% of those who only invest in one
fund are in the trustees’ investment strategy.
We know that the members who opt out of the trustees’ investment strategy are higher
earners, generally more sophisticated, and most have their own IFA.
Number of funds chosen Percentage of members
1 fund 96.8%
2 funds 1.3%
3 funds 0.6%
4 funds 0.6%
57 funds 0.6%
79 funds 0.6%
10 funds Negligible
Over 10 funds Negligible
1 Fund 2 Funds 3 Funds 4 Funds
57 Funds 79 Funds 10 Funds Over 10 Funds
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5.4 Presentation of funds
This small range of funds – the five funds outlined above (including a default fund), plus
possibly an ethical choice and a religious fund – should be ‘whitelabelled’, in other
words, not branded.
AEGON does not believe there is any need to offer any additional funds to the ones
outlined above, nor any need to offer any branded funds within the personal accounts
model and specifically to the target market.
Introducing branded funds means introducing a lot more complexity and choice. The
target market for personal accounts may not have much experience in saving in more
complex investment vehicles, and there is a very real risk that this additional choice will
encourage people to opt out of personal accounts. It also means increased
communication. Each fund – its risk profiles, its aims etc. would have to be explained
in simple terms.
We do not believe this approach would encourage more of the target market to save
more money. Instead, adding additional branded choice focuses on those who are
outside the target market, and may mean the target market subsidising those people
who have more income and who want more choice. This is because including branded
funds raises complexity of sending money to more fund managers, increases the
communication costs, and adds to the responsibilities (and therefore costs) of the
delivery authority and the PAB.
Including branded funds also puts more onus and responsibility onto the delivery
authority and the PAB. They will be responsible for monitoring the funds’
appropriateness, relative to alternatives in the market. They will also have to make
decisions, for example, when a fund manager leaves would this affect the decision to
retain this investment.
Branded choice is more appropriate in an environment where a financial adviser is
involved, either in helping the employer or trustees design an appropriate fund range,
and/or where the individual is receiving advice on their options.
AEGON recommends offering a very brief choice of nonbranded funds –
including a default fund, a cash fund, a fixed interest fund, a UK growth fund
and a worldwide equity fund. The PAB can offer additional choice through an
ethical fund and a religious fund, probably for higher fund charge.
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6. SUPPORTING EMPLOYERS
6.1 THE DETAIL OF THE EXEMPTION TEST
A simple exemption test is essential to make sure employers easily maintain current
good pension schemes.
Pension schemes cross a wide range of pension arrangements and are not exclusively
defined benefit schemes or large money purchase occupational schemes. We have
concerns that the exemption test may be set to apply only to occupational schemes,
and not the full range of workbased arrangements, including group personal pensions
and group stakeholder pensions.
We strongly believe the aim for the exemption test should be for employers to be able
to identify at a glance whether their pension arrangement passes the test.
6.1.1 Defined contribution level
The White Paper outlines the exemption test for defined contribution schemes should be
a contribution rate the same as personal accounts 8% of band earnings.
This is not a simple approach. In practice the vast majority of schemes offer a
contribution rate as a percentage of full earnings (although there are different
definitions to what ’full’ earnings are – for example some include overtime, some don’t).
We recommend the defined contribution level should be set as a percentage of full basic
salary, and not band earnings.
In setting a more appropriate rate we have to make sure not only that the test is
simple, but it balances the need to reduce the impact on employers already offering
provision (and so minimise levelling down) with future concerns to encourage people to
retire on an adequate income.
We therefore recommend that the contribution rate should be set as an
employer contribution of 3% of basic salary (in other words, overtime should
be excluded).
This will make sure existing good schemes pass the test easily and simply at a first
glance, and the member still receives the benefit of a full employer contribution (and
not one only based on band earnings), rather than level down. This approach would also
make sure that employers who had in good faith established a pension in response to
the Government’s stakeholder initiative are also able to continue their scheme.
We do not believe there should be a required employee contribution within the exempt
scheme test, although this can be encouraged. The important aspect is ensuring
maintenance of the employer contribution.
The lack of an employee element will also help protect those employees who have set
up individual pensions for themselves. Their employer can exempt itself from personal
accounts by paying 3% into another vehicle, allowing individual to continue paying into
their existing individual contract. Any alternative approach risks levelling down not just
existing group arrangements, but also risks mass discontinuance of existing individual
pensions.
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Alternative
Whilst we prefer the simplicity of the above recommendation, and believe it is the best
approach to maintaining and extending current pension provision, we acknowledge that
in certain circumstances the overall pension contribution could be less than accepted
under personal accounts.
An alternative approach is to ensure that the contribution received is greater than that
expected under personal accounts, for the majority of people in the personal accounts
target market (up to £20,000 a year). Based on this approach – as shown in Appendix 2
– the defined contribution rate could be set as a choice of:
§ 6% contribution of basic salary (including at least 3% employer contribution); or
§ 8% of band earnings
6.1.2 Contractbased arrangements
Due to the evolution of the pensions market over recent years, with the accelerated
move away from privatesector defined benefit schemes, contract workbased pension
arrangements are becoming a growing force within pension provision in the workplace.
They often offer significant pension benefits to individuals, and frequently this is
extended to include some deathinservice benefits. For example, the most frequently
occurring profile for group personal pensions with AEGON is an employer contribution of
5.5% and an employee contribution of 4% of basic salary (giving a contribution rate
which far exceeds the basic personal account profile).
It is fundamental that we have an exemption process for these types of arrangement
that is both easy and simple, and isn’t too dissimilar to that for money purchase
occupational schemes. We would like to work further with the DWP to achieve this goal.
6.1.3 Autoenrolment
We agree with the principle that to pass the exemption test schemes should offer auto
enrolment. However, whereas this is achievable for occupational schemes, current
interpretation by the Government of European legislation means that contractbased
schemes will not be able to do this in the simplest terms.
It is imperative that this current stance does not lead to contractbased schemes
automatically failing the exemption test.
Instead, we believe, in the first instance, the Government should interpret the
provisions of the Distance Marketing Directive (DMD) to not apply to any contract based
pension arrangement (group or individual) where there is an employer contribution of at
least 3%.
Alternative
Only if this is unachievable should we look for alternative action. In doing so, we
strongly feel it is important that in setting exemption tests Government focuses on
measures that achieve the outcome of the individual being enrolled into a pension plan
with the minimum of intervention from themselves. Being too prescriptive within this
area and focusing on method rather than outcome would have a devastating impact on
the pension provision for hundreds of thousands of people who are members of
contractbased arrangements.
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We recommend that to meet the exemption test:
§ An occupational scheme operates autoenrolment; and
§ A contractbased arrangement operates an approach to achieve the same outcome as
autoenrolment.
To meet European legislation, the member has to give their prior consent to the
contract. This could be achieved by requiring the member to sign their consent before
the contract is set up, either on a separate form as part of the joining process, but
ideally as part of a contract of employer. The employer would store this information.
This approach will still achieve the desired outcome of employees becoming members of
the arrangement without (necessarily) having to make choices about contribution level
or investment choice.
In particular, we would welcome the opportunity of discussing this area with the DWP
and whether employment law can be altered to give an overriding change pertaining to
this on a national level, and a protection to employees.
6.1.4 Reautoenrolment into exempt schemes
Again, we agree in principle reautoenrolment should be part of the exemption test for
good employer schemes. However, we believe employers should have the flexibility to
set the reautoenrolment date for employees who opt out as a scheme date, rather
than the anniversary of when the individual opted out.
This will mean this feature is easier to accommodate in practice, by approaching groups
of employees on a set date (rather than maintaining individual records). It also means
that no individual will have a reautoenrolment period longer than the maximum (for
example three years).
6.1.5 Individual arrangements
There will be many employers, for example employing fewer than five employees, who
believe there is no benefit in setting up a group arrangement for them. Instead, we
recommend these employers should be able to offer paying 3% employer contribution
to any pension vehicle, but this is not reliant on the employee also paying any
contribution into the same vehicle.
We believe it is important that if an employer can show they are contributing the
exemption test defined contribution rate to an individual contract, then there should be
no requirement to autoenrol the employee into personal accounts.
6.1.6 Default investment funds
The provision of a default investment fund is likely to form part of the exemption test
for defined contribution arrangements (including occupational schemes and contract
based arrangements).
AEGON – like other providers – has a wide range of funds suitable for use as default
funds including lifestyling. Our experience is, especially for contractbased
arrangements, financial advisers help employers to choose the most appropriate default
funds for their particular profile of employees.
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So, for example, the default fund chosen for a group arrangement for a firm of solicitors
would be very different that the default fund chosen for a group arrangement for an
engineering firm.
While we accept a default fund should be part of the exemption test, we believe that the
parameters of the default fund should not be set too tightly for situations where through
advice the most appropriate default fund can be selected for the benefit of the
employees.
6.1.7 Waiting periods
We welcome the Government’s intention to consider giving waiting periods for some
schemes. Often the reason why pension provision is not deemed a major benefit in
some industries is because of the high turnover rate, and thus employees don't think
they will benefit from it. Employers are also reluctant to offer it for these reasons.
6.1.8 ‘Kitemark’ for good schemes
We agree in broad principle that good pension schemes should be awarded a ‘kitemark’
to help separate them out in the eyes of current and future employees.
But to this make work in practice the scheme has to be open to every type of group
arrangement and not just occupational schemes. In addition, it has to be very simple,
with only one level of kitemark rather a range (depending on level of scheme
attainment).
It’s also important that employees understand what the ‘kitemark’ stands for, and in
particular that they are under no misapprehension that it gives some sort of ‘guarantee’
for scheme performance (whether that relates to the solvency of defined benefit
schemes or the investment return under defined contribution schemes).
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Box 4: AEGON’s approach Streamlined joining
Many employers wish to autoenrol members into contractbased
arrangements. Often, this stems from a desire to simplify enrolment
administration and to make setting up a pension scheme simple and easy.
Consequently, many providers of contractbased arrangements have designed
enrolment solutions that offer an alternative to autoenrolment.
AEGON Scottish Equitable has chosen to offer to operate a ‘streamlined joining’
approach for new group personal pensions (GPPs) and group stakeholder plans
(GSHPs) set up by employers, and around 70% of our new schemes are now
set up on this basis.
Employer chooses to set up scheme with streamlined joining
¯
Employer announces scheme to employee (and the employer chooses how to
do this – eg mailing, presentation, or support)
¯
Send employee an Employee Authorisation Form (EAF) and prejoining pack.
The employees signs the EAF and gives their: (1) prior consent under the
contract (as required by DMD); (2) consent to deduct contributions from
earnings; and (3) consent to employer to pass personal details to provider
¯
Employee decides to join scheme and signs EAF and returns to employer.
Employer stores these
¯
Send employee a joining pack including key features and a precompleted
application details. Employee to check all details correct
¯
Send employee policy documents (eg policy conditions)
¯
Contribution deducted from earnings
¯
Send employee postsale information, including cancellation notice
AEGON 20 March 2007
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6.2 EMPLOYER CHOICES
The success of pensions reform needs to be judged on how many employers maintain
their current pension provision and open it up to autoenrolment for new employees, as
much as the number of people contributing to personal accounts.
For many employees, the prospect of contributing to their employer’s exempted pension
scheme presents a much better opportunity to achieving a decent level of income in
retirement than contributing to a personal account. Many schemes also offer other
benefits (in addition to pensions) such as life cover and spouse’s protection as well.
Employees value highly this cover.
Pensions reform will have a very big effect on employers, and they face difficult
decisions in the run up to 2012 and beyond.
Autoenrolment into current good scheme provision will be an additional expense, and
levelling down of contributions becomes a real threat because:
many employers may perceive a signal from Government that doing less is all that’s
expected of them, by employees and Government;
§ the effort of persuading them to engage and stay engaged stops because the reduced
contributions and/or margins doesn’t remunerate it;
§ the rules and decisions of the new world are complicated and employers take what
they think is the path of least resistance; and
§ if all employees are autoenrolled, the total costs for an unchanged contribution rate
will increase with membership.
Employers have several different avenues of action open to them. They could:
§ keep schemes open to autoenrolment for all new members, but reduce their
contribution rate
§ keep schemes open at the same contribution rate, but only for some new employees
(for example senior management)
§ keep everything the same for their existing people but offer new joiners personal
accounts
§ freeze existing schemes for everyone and only allow present and future employees to
save in personal accounts going forward.
Employers face a complex series of decisions, except for the minority who already have
autoenrolment.
The diagram below shows a suggested thought process in the run up to 2012 for an
employer with a current scheme. It demonstrates that the main issue for these
employers centres more around the issue of increased autoenrolment than the level of
contribution. And that face questions both of principle (including affordability) and
practicality (including administration). All this suggests that the threat of levelling down
is much greater than first anticipated as all existing schemes will have to fundamentally
review their current arrangements. Therefore, inertia will not operate; doing nothing will
not be an option.
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Employer with existing scheme
What shall we do
with the scheme?
Enrol Y
non/new
N Is upgrade to
Will it pass the GST?
members GST affordable?
affordable? N
Level up
to GST level
Y N
Y Y N
Can we afford
Level down to
more than PAs?
affordable rate
Y N
Implement Enrol new members? Autoenroll
a/e into into PAs
existing scheme
6.2.1 Giving employers confidence to plan their future
The exemption process for employers has to be very simple and easy to help achieve
the objective of pensions reform for employers to maintain and open up their current
pension provision.
Most employers will only seek initially to comply with the requirements if they are
properly informed about them and if they are easy to comply with. This highlights the
need for a full and effective communications campaign, both in the run up to 2012 and
beyond, to allow employers to make the best decisions about their ongoing pension
provision, for both them and their employees (both current and new).
Although we agree with the principle of selfcertification, we would welcome the
opportunity to work with the DWP to explore exactly how this would operate in practice.
It is important that in introducing an exemption test we encourage employers to exempt
their schemes for new entrants and so avoid levelling down. There are several ways to
do this that will allow those employers making decisions on whether to exempt current
arrangements the ability to plan over the short and medium term with confidence. This
AEGON 20 March 2007
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32
could help them avoid a ‘cliff edge’ of expenses in 2012 and frighten them into personal
accounts.
These include:
1. Giving employers a degree of stability by setting the exemption test in primary
legislation, and promising to make no changes to the exemption test for a certain
period of time, possibly eight years.
2. Allowing employers to phase in contributions for exempt years over the same period
as those operating personal accounts.
3. Setting the terms of the exemption test as soon as possible, to give employers the
time to consider their strategy and make any adjustments in an appropriate
timeframe.
6.3 WORKING WITH A CENTRALISED MODEL
6.3.1 Target employers
It is important that the centralised model is designed with the target employer market
in mind.
If the target market for personal accounts is lower and moderateearning employees
who do not have access to a pension scheme, then it is reasonable to assume the target
employers are generally small and medium employers who have no experience of
providing pension provision.
For example these employers may not have automated payroll systems; they may pay
weekly (not monthly); their staff may only be employed on temporary contracts for a
few weeks at a time; they may not have a dedicated person (or team) for HR issues.
6.3.2 Centralised model
AEGON continues to believe that a brandedprovider model would be the less risky
approach for the delivery of personal accounts than the centralised route the
Government has chosen.
We believe it would be less risky for Government. Creating a centralised model is an
immense undertaking, and indeed the result will probably be larger than anything
comparable in the UK. This is unchartered waters for the DWP and delivery authority,
and there is considerable risk in making sure the different administrators and other
contractors work on a joinedup basis, as well as developing a ‘front of house’ to provide
central functions. Adapting a proven model, such as the personal pension market, would
be a far less risky approach.
We believe it would also be less risky for employers. Adopting a centralised model, and
allocating administration contracts to several different organisations (sometimes for the
same function) emphasises the need to have a smooth ‘frontofhouse’ experience for
the main customers of personal accounts. For employers the aim is to probably achieve
this through the clearing house. However, there is a big risk that where issues arise
employers are unable to discuss them with the institution directly responsible for the
administration.
We believe it would also be less risky for employees, as a provider model would
encourage competition by continually promoting innovation and improvement of service.
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Centralised systems have no intrinsic force for change, and whatever level of service is
being provided becomes acceptable because customers are forced to fit in with the
monopoly provider, rather than ‘voting with their feet’.
6.3.3 Controlling the administration burden for employers
It is imperative that in designing personal accounts the Government is aware of
controlling the administrative burden for employers. Otherwise, some employers will
choose not to engage with personal accounts, by either flagrantly refusing to
communicate with it, or by encouraging their employees to opt out to prevent them
from having to operate with it.
The Government should adopt the following principles to control the administration
burden for employers:
§ All correspondence from the centralised unit to the employee should be sent direct to
the member’s home address, and not via the employer.
§ All questions from the employee on personal accounts – including contribution
deduction – should be directed to the centralised unit.
§ Care should be given in designing the contribution payment facility to avoid
‘unwinding’ pension contributions wherever possible, whilst giving employees ample
time to opt out of personal accounts.
We welcome the Government’s intention to set up a group of experts to work together
on refining the assessment of the cost impact on employers, but recommend that
includes industry pension experts and employer representative bodies as well as
Government.
AEGON 20 March 2007
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7. HELPING PEOPLE MAKE
GOOD DECISIONS
7.1 Autoenrolment
We believe that one of the key criteria for personal accounts to succeed is if individuals
are autoenrolled into them and employers are compelled to contribute. Without either
of these pillars, personal accounts will certainly fail the Government’s objective to make
more people save more money for their retirement.
There is, understandably given the target market, a lot of concern and debate about the
extent of the interaction between personal accounts and meanstested benefits, and
therefore the role of autoenrolment. Both the Government and other parties, for
example the PPI, have invested considerable resource in investigating the ‘potential
paybacks’ for different groups of people who invest in personal accounts.
The PPI, in particular, has adopted a ‘traffic light’ approach to identify the groups most
16
at risk of ‘losing out’ by investing in personal accounts . Its three risk categories are for
a median earner, broadly:
§ Low risk – those with full NI record;
§ Medium risk – those with intermittent unemployment or older at age of entry;
§ High risk – those renting in retirement
We believe that at the start of saving it can be impossible to predict with certainty
whether investors will fall eventually into these categories (with the exclusion of the
period they have left to save – see 7.3 below).
We believe the Government should take the approach that autoenrolment is a national
rather than an individual debate. Autoenrolling people into pensions savings (whether
personal accounts or an employer’s exempt scheme) is in the ‘greater good’ of the UK
population, and an issue for the nation’s benefit.
Individuals, of course, have the option to opt out of personal accounts and choose not
to save. Generic advice will have an important role to play here, and wherever possible
will help to identify those who are more likely to fall into the PPI categories of at
medium and high risk.
However, in taking this approach it is important that the Government documents this
publicly, and anyone associated with autoenrolment (or any other approach that
achieves the same outcome as autoenrolment) into any pension vehicle – not just
personal accounts is clearly indemnified against retrospective claims for poor advice.
7.1.1 Autoenrolment into other pensions
Autoenrolment into exempt pension schemes is also important if pensions reform is to
succeed.
16
PPI: ‘Are personal accounts suitable for all?’ November 2007
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There is no material difference why autoenrolment into personal accounts should be
treated any differently that autoenrolment into other pensions, and the Government
should adopt the same approach and clearly indemnify those associated with auto
enrolment on a similar basis to that outlined above.
7.1.3 Maximum default age
While it is very hard to predict who will have periods of unemployment or self
employment in their working life or who will rent in retirement, we can say with
certainty who at the point of joining will only have a short time to save before
retirement.
We therefore recommend that a default autoenrolment age of 55 is set to prevent
people autoenrolling into personal accounts or other exempt pension schemes, who
may fall into the medium risk category outlined by the PPI.
Generic advice would probably guide most over50s to opt out. But we believe it is a
more efficient solution to simply set a maximum enrolment default age of around 55.
Those older employees can still choose to opt in if they so wish, for example if they
foresee themselves taking later retirement, and would then receive the employer
contribution – potentially even past state pension age.
The PAB should review the maximum default autoenrolment age after eight years, as in
time older employees should have built up more savings and will be at less risk of losing
savings through meanstesting.
7.2 The role of generic advice
AEGON believes the role of generic advice – that is personalised but unregulated
financial advice – will be to set out the considerations most relevant to an individual’s
circumstances, and to encourage them to take action based on an understanding of the
relative risks and rewards in saving in pensions.
It is vital component of reform as it:
§ Is the best tool we have to actively engage people in the decision to start and
continue saving for retirement.
§ Is a powerful aid to managing the risk of opting out.
§ Can help savers understand the risks of defined contribution pensions, and prepare
them for the volatility of return and outcomes.
§ Introduces an understanding of risk – inflation, employment, social (such as divorce)
and political (such as changes in benefit policy).
§ Encourages people to save more than the default, where they have the means and
aspiration to do so.
§ Can help teach how to monitor progress and adjust plans as economic and life events
unfold.
§ Will set these decisions in the proper context of people’s financial affairs.
Because these are all matters of personal judgement and risk appetite, leaflets and
decision trees are not effective on their own. People need to discuss the relative
importance of the various factors and test their conclusions interactively to be
persuaded.
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As there is no margin to pay for these services within personal accounts, they will need
to be available free at point of use. The cost would need to be met from other sources.
All the evidence shows the employed remain fundamentally resistant to paying fees for
this type of advice.
7.2.1 Importance of information at retirement
AEGON has welcomed the Government’s review of how people buy retirement income
17
solutions at retirement, following on from the Treasury’s recent report .
We are supportive of the objective to give the UK population the tools to make the right
decisions at retirement, and to make sure the process by which people buy annuities
work efficiently and smoothly.
We therefore believe that generic advice not only has a part to play when a person
decides to initially stay in personal accounts or their employer’s exempt scheme, but
also throughout their savings lifetime, and specifically at retirement.
The ideal outcome is for individuals to understand annuities and to select the retirement
choice suitable for them. But, at the same time, we need to avoid swamping the
individual with vast quantities of information.
17
‘The Annuities Market’ (December 2006)
AEGON 20 March 2007
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8. GOVERNANCE, REGULATION
AND INFORMATION
8.1 PERSONAL ACCOUNTS AS AN OCCUPATIONAL PENSION SCHEME
The Government has indicated its preference to set personal accounts up as a defined
contribution occupational pension scheme.
This will allow autoenrolment into the scheme and will present a different regulation
and disclosure environment, but we believe this decision sits uncomfortably with how
personal accounts are to be established and how they are perceived by members.
An employer usually establishes an occupational pension scheme under trust. This is
against the reality of personal accounts, where a disengaged employer will simply be
responsible for sending money to a centralised unit. Generally, they are not engaging
with personal accounts through any wish to improve the retirement circumstances of
their employees, rather through a legal imperative.
The trustees are the legal owners of the money and hold it in trust for the benefit of the
members. This is at odds with the name ‘personal accounts’ where people may
mistakenly believe they ‘own’ the money themselves.
We believe the decision to set personal accounts as an occupational pension scheme is
one of convenience, and has not been made through any sense of being the right
decision for the members.
8.2 REGULATION OF EMPLOYERSPONSORED PENSIONS
The regulation of personal accounts as occupational pension schemes, if adopted
without amendment, will be significantly less than personal pensions or stakeholder
pensions, and so will be simpler, more costeffective, but less protective.
This creates a serious mismatch between personal accounts and personal pensions, and
runs the risk of introducing regulatory bias into the marketplace, distorting competition
and reducing customer protection for personal accounts holders.
To the member, the only difference between personal accounts and personal pensions is
the employer may be less engaged with personal accounts.
We therefore recommend that the regulation of all employersponsored
pensions is set at a similar level.
8.2.1 FSA Regulation
We believe the regulation of personal accounts and private sector led provision should
be based on the same principles, with specific focus on encouraging savings. FSA
regulation of the private sector would need to be amended as follows:
§ Where employer contributions match employee contributions, current suitability
regulation should not apply; and
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§ Money invested which does not attract an employer contribution (higher regular
contributions and lump sums) should be subject to the current level of advice and
protection as applied by the FSA to contractbased arrangements.
8.3 WHO WILL REGULATE PERSONAL ACCOUNTS?
18
Paul Thornton’s current consultation suggests the Pensions Regulator should regulate
personal accounts and employers ‘as it is clearly relevant to the most effective future
distribution of functions’. However, we believe the regulatory framework may be more
complex than a single regulator given the design of personal accounts.
Regulation of personal accounts will include a number of elements:
§ Advice and information
§ Provision and administration
§ Fund management
§ Employer responsibilities
§ Collection of contributions from employers (clearing house)
§ Autoenrolment
When designing the regulatory framework, we believe the correct starting point is the
customer, and the objective of pensions reform. This means that the choice of regulator
is not a simple one between the FSA and the Pensions Regulator, as neither would be
appropriate as regulator for all elements without significant change to their remit.
Instead, we believe regulation should be split between the FSA, the Pensions Regulator
and the delivery authority.
Appendix three outlines our suggested approach to how these areas may be regulated
under personal accounts. It also considers how the existence of personal accounts will
affect pensions regulation more generally, and suggests different regulators depending
on the purpose.
While we assume the delivery authority or PAB will not be a ‘regulator’, the relationship
it will have with regulators will clearly be different from any other relationships between
trustees, providers or other regulated organisations. As such, we would expect tailored
relationship management with two way discussion as opposed to ‘supervision’.
8.4 INFORMATION AND COMMUNICATION
The level and quality of the information will be an essential factor in the success – or
otherwise – of personal accounts, and of pensions reform in general.
In considering the information and communication aspects of personal accounts, it is
important to note that the financial promotion of any type of employer arrangement
should be fair and decent, and that the same principles apply regardless of whether the
pension is a personal account, an occupational pension scheme or a contractbased
pension arrangement.
18
‘Review of Pensions Institutions’ (March 2007)
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8.4.1 Communication campaign
We recommend the Government launches a campaign promoting the benefits of saving
now for retirement, and not waiting until 2012. This will encourage those employees
who have the option of joining their employer’s pension arrangement to do so. This will
help prevent ‘planning blight’. Later, as we approach the start date for personal
accounts, the emphasis should move to explaining the impact the new vehicle might
have on individuals and employers, including ensuring good existing provision is
appropriately valued.
8.4.2 Communication material
It is crucial that the delivery authority and later the PAB take ownership of developing
the right communication material. Possible ways of communicating include:
§ Advertising and promotion – ranging from simple poster campaigns to sponsorship of
financial planning classes at night school. We encourage the Government to work
closely with organisations such as pfeg in developing an appropriate strategy.
§ Written material – for example simple, plain English guides explaining personal
accounts. People will need information packs and a yearly benefit statement, possibly
issued on their birthday.
§ Internetbased tools – these are powerful ways of demonstrating retirement savings,
and bringing into sharp focus a customer’s individual situation. We urge the
Government to pick up previously discarded plans to build an online Retirement
Planner showing the accumulated and projected values of all pension plans.
§ Helplines – the centralised model should offer helplines for both employers and
members to offer assistance in answering immediate questions about contributions
and choices.
It is essential that it remains the responsibility of the delivery authority and the PAB to
own these communications. This is regardless of any outcome from the Thoresen
Review which may suggest generic advice being offered within the context of personal
accounts.
The Government and delivery authority should note that if the cost of any of these
communications is explicit and additional to a standard charge it will diminish users’
requests. For example, charging customers for a yearly statement will mean many
customers not requesting this. This would be an unsatisfactory outcome. Pensions are
intangible, and unless communications are clear, exciting, consistent, and frequent then
people will not engage with their retirement planning, and the UK will not achieve the
overall objective of pensions reform.
AEGON 20 March 2007
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9. DELIVERY AUTHORITY
How the delivery authority, and its successor the PAB, will work will be paramount to
the success of personal accounts. It’s therefore important that its powers,
responsibilities, objectives, structure and governance are set out clearly from the start.
9.1 Structure
The White Paper outlines that the delivery authority and PAB are envisaged to be
completely autonomous from the Government. They will both be made up, partly, of
industry experts. The White Paper promises us the chairman and chief executive will
almost certainly be recruited from the private sector. We believe it’s important that they
are and that they are independent. There’s too much riding on what the delivery
authority has to do to allow any conflicts of interest to slip in.
9.2 Powers
The delivery authority and the PAB should be given the powers to create and then
efficiently run a personal accounts scheme. We are pleased to note John Hutton’s
confirmation that the responsibility for analysing and minimising the impact of their
actions on the wider pensions market will be hardwired into legislation outlining their
objectives. However, their powers should be limited solely to personal accounts.
It’s therefore vital the delivery authority and PAB have a clear and precise definition of
their target market. This should include clear parameters such as:
§ Those who fall into a certain age range (from 22 to a higher age set lower than state
pension age initially)
§ Those who fall into a certain income range (lower earners)
§ Those who do not work for an employer who offers a pension scheme
One of the delivery authority’s powers should be to set a charge level (and possibly
shape) for personal accounts. It should be able to do this as a result of the final design
of personal accounts (both product and system) and as a result of the tendering
process.
It’s essential the delivery authority has an obligation not to create a system subsidised
by the taxpayer, with costs recovered through charges made to personal account
holders within a commercially reasonable timeframe.
9.3 Objectives and responsibilities
The objectives of the delivery authority and PAB should be tightly aligned to those of
pensions reform generally in particular, the aim to encourage more saving, not just
more savers. This area should be strictly accountable.
This means that although the delivery authority’s and the PAB’s powers will centre on
personal accounts, both should have responsibility to maintain a thriving market outside
personal accounts as well, in the run up to 2012 and beyond. So, for example delivery
authority should also have a duty to rigorously analyse the impact of any proposal on
the wider market and should avoid taking actions which result in collateral damage.
AEGON 20 March 2007
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This may include making sure a level regulatory playing field exists between personal
accounts and other pensions, although this may sit better with Government or one of
the existing regulators. This requires further analysis.
9.3.1 Information and generic advice
The delivery authority should have a duty to make sure individuals and employers not
only have access to information about their rights and responsibilities under the new
system, but also to basic ‘generic’ advice taking into account their own circumstances.
This might be similar to what the New Zealand Retirement Commission provides.
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.
9.4 Role of the Government
By limiting the delivery authority’s powers only to personal accounts, this leaves a
chunk of pensions reform outside personal accounts where decisions still have to be
made and ownership taken.
For example on setting a good scheme test, and introducing proposals to help
employers maintain and open up good current existing pensions to their workforce.
We believe the Government should take responsibility for setting the overall framework
and for the nonpersonal accounts aspects of pensions reform, and it should set out
clearly what areas it has responsibility for and what areas the delivery authority has
responsibility for.
9.5 Role as ‘trustees’
The White Paper confirmed personal accounts are to be set up as a defined contribution
occupational pension schemes. There are two ways the Government can achieve this –
either under trust or by statute. The latter route is complicated and legislatively
burdensome, and therefore Government may prefer to take the former option.
If personal accounts are to be set up under trust, then the PAB will presumably take the
role of trustees. It will therefore be the ‘legal owners’ of the pensions savings, holding it
in trust for the benefit of the employees.
We recommend the PAB is aware of this and the responsibilities the role of trustee
brings. The PAB will have to communicate this to members who may remain under the
misapprehension that the personal account savings are ‘their own money’.
9.5.1 Complaints
The PAB is responsible for engaging the contractors to operate the centralised unit. If a
member has any complaint with the administration of their pension, or the information
they have received, it is important that it’s clear to them that they can complain to the
PAB. A redress system must also be put in place to deal with these complaints.
It is important that any complaints and redress processes put in place for personal
accounts are at least as robust as those in place for other occupational pension
schemes, and that members are aware of the role the PAB plays in securing the best
administration ‘deal’ for them and the smooth running of the centralised unit.
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Appendix One: White Paper
consultation questions:
1. With regard to the target group for personal accounts:
Whether there should be a cohort of employees approaching State Pension age
at the time personal accounts are launched who should not be automatically
enrolled into personal accounts.
Whether in practical terms, this might adversely affect the interests of this
group, because they would be less likely to exercise the positive choice to opt
in.
Whether three years is the right period for repeat automatic enrolment of
employees who have opted out of personal accounts.
How this would affect employers and employees.
§ AEGON believes it is imperative to set a clear target market for personal accounts.
Briefly, it should be moderate and lowerearning employees who do not have access
to their employer’s pension scheme. Section 3.1 covers this in more detail.
§ We believe that a lower maximum default age should be set for autoenrolment into
both personal accounts and exempt schemes. We believe this should be age 55
initially.
19
§ PPI research shows the internal rate of return for a 55 year old man with a full NI
record autoenrolled into personal accounts would be 4.3% (compared to 5.9% for a
comparable 25yearold man). We therefore do not believe older people will be
adversely affected by not being autoenrolled into pensions.
§ We agree three years is the right period for repeat automatic enrolment of employees
who have opted out of personal accounts. But we have concern of who should initiate
the ‘reautoenrolment’ process, and believe this responsibility rests with the personal
accounts centralised unit rather than the employer.
19
PPI: ‘Are Personal Accounts suitable for all?’ (November 2007)
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2. Delivering personal accounts:
How can members’ interests best be represented in the governance of personal
accounts?
What sort of information should support personal accounts and the
responsibilities of different organisations in communicating this information?
§ Section 8.2 outlines our thoughts in this area. We believe the regulatory framework
should be designed around the customer, and different regulators should be tasked
with regulating the most appropriate area for them.
§ Appendix three outlines our suggested approach to how personal accounts should be
regulated, and suggests different regulators for different areas.
§ The delivery authority should have overall responsibility for communication in respect
of personal accounts – to both employers and customers. To involve more than more
communicator (for example the Pensions Regulator) would lead to confusion.
§ Section 8.4.2 outlines some suggested communication materials.
3. The appropriate method of charging members for personal accounts:
What overall charge structure is most appropriate?
How much flexibility should the personal accounts delivery authority or the
personal accounts board have in deciding the charging structure?
Are there particular circumstances or activities where it is appropriate to make
an additional charge?
§ AEGON recommends setting a charging structure of a contribution charge plus a
modest annual management charge. We believe this structure comes closest to
recouping costs in a way that mirrors the incidence of how they occur, but also
addresses customers’ concerns about the level and frequency of charges (and so
encourages them to remain opted into personal accounts). Section 4.4 covers this
area in more detail.
§ We believe the delivery authority should be responsible for setting the level of
charges, based on the final design of personal accounts and a commercial tendering
process. The Government should not impose the level of charges, nor should it set
aspirational charge targets at such an early stage, before the exact way the model
will work has been agreed, the contracts awarded, and the exact level of
communication agreed upon. The Government should be involved in setting an
appropriate shape of charge, taking into account crosssubsidies for the target
market.
§ The PAB should be responsible for monitoring the charging structures alongside its
responsibility to renegotiate contracts.
§ It may be appropriate to make an additional charge for some fund choices (such as
ethical fund management). Section 5.3 covers this area in more detail.
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4. For employers offering ‘nonoccupational’ workplace pension arrangements:
How can the Government treat such arrangements as ‘schemes’ for the
purposes of exemption from personal accounts requirements?
How can the Government ensure that, in the absence of automatic enrolment,
these can offer similar levels of coverage and saving to those estimated for
automatic enrolment?
§ AEGON strongly believes that contractbased pension schemes have an essential part
to play in providing good workplacebased pension provision to hundreds of
thousands of employees in the UK.
§ We believe, in the first instance, the DWP should ensure the provisions of the
Distance Marketing Directive (DMD) do not apply to any contractbased pension
arrangement (group or individual) where there is an employer contribution of at least
3%.
§ Only as a fallback, should the Government consider other measures. In this case, we
strongly feel it is important that in setting exemption tests Government focuses on
measures that achieve the outcome of the individual being enrolled into a pension
plan with the minimum of intervention from themselves. We recommend that to meet
the exemption test:
o An occupational scheme operates autoenrolment; and
o A contractbased arrangement operates an approach to achieve the same
outcome as autoenrolment.
5. In relation to waiting periods in personal accounts:
The Government is not proposing a formal waiting period for personal
accounts, although it recognises that there will be a short period before the
automatic enrolment process is completed. This is an area in which the
Government continues to welcome views.
In relation to waiting periods and scheme exemption, the Government is
interested in views on:
Whether employers with exempt schemes with contributions that are higher
than the minimum level, could operate a short waiting period, of perhaps three
or six months, to encourage them to continue to offer goodquality schemes.
What is the minimum level of scheme contributions above which a waiting
period is acceptable.
§ We agree with Government that there should not be any waiting period for personal
accounts. However, we would urge the Government to consider the practical
implications of how autoenrolment should work carefully, to give members sufficient
AEGON 20 March 2007
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time to consider their position and to allow them to opt out if so desired, before the
first contribution is deducted from their pay. ‘Unwinding’ this payment will be
complicated, and so should be avoided. Deducting contributions too quickly (in other
words before a decision on whether to opt out has been made) without ‘repaying’
them will only alienate the target audience.
§ We agree that employers with exempt schemes that are higher than the minimum
should be allowed to operate a short waiting period. This would be particularly helpful
to those employers with high turnover rates of staff.
6. How the Government could ensure that employers with exempt schemes
have the flexibility to manage the implementation of these reforms in the same
way as employers who will operate personal accounts, for example by:
phasing in the minimum employer contribution or levels of accrual for exempt
schemes over three years or an appropriate period;
phasing in by groups of employees; or
some other approach.
§ We recommend the Government helps employers with exempt schemes to manage
the implementation of these reforms, and retain a degree of flexibility of how this is
achieved. Employers should be allowed to phase in contributions for exempt years
over the same period as those operating personal accounts for defined contribution
schemes. Equally, larger employers should be allowed to phase in pockets of
employees over a period.
§ Other measures to help employers include:
o Setting the exemption test in primary legislation, and making no changes
to it for a set period (possibly eight years).
o Setting the terms of the exemption test as soon as possible to give
employers the time to consider their strategy and make any adjustments
in an appropriate timeframe.
7. With regard to the approach to compliance:
How can employees, who choose to save in personal accounts, best be
protected from suffering detrimental treatment by their employers compared
to those that opt out?
What type of information and support would encourage compliance?
How processes can be designed to encourage compliance.
How the proposed penalty regime could be structured.
How valuable would a whistleblowing helpline for employees be?
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§ Good information and communication is at the heart of compliance of personal
accounts legislation. This starts with a vibrant and effective marketing campaign by
Government to ensure employers and employees are aware of their rights and
obligations. Government also needs to contact employers proactively, giving them
help understanding their new obligations.
§ Helplines for employees and employers should back this up by giving them the
opportunity to ask people for assistance of what they have to do and how they have
to do it.
8. Given the twin aims of focusing the scheme on the target market and
allowing sufficient flexibility for individuals within the scheme:
Should the annual contribution limit be set higher than £5,000? If so, at what
level?
§ We agree with the decision to have a contribution limit for personal accounts. We
believe this will minimise the potential for individuals to commit significant sums to a
pension without seeking regulated advice. This is important in view of the longterm
nature of retirement savings. But we firmly believe maintaining a thriving pensions
market alongside personal accounts will be beneficial to most people as it will provide
diversity, specialised features, individual regulated advice, and encouragement to
increase contributions to adequate levels.
§ We believe that a proposed contribution cap of £5,000 is inappropriate for the target
market, and instead recommend adopting a cap of £3,000 a year. Section 3.4 outlines
our reasoning.
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Appendix two – comparable
contribution rates to personal
accounts
The table below shows the comparable contribution rates for personal accounts and
other pension arrangements (judged on a percentage of basic salary).
Personal 3% 6%
Account contribution contribution
Contribution (of basic (of basic
(8% of band salary) salary)
Basic Salary earnings)
£10,000 £400 £300 £600
£11,000 £480 £330 £660
£12,000 £560 £360 £720
£13,000 £640 £390 £780
£14,000 £720 £420 £840
£15,000 £800 £450 £900
£16,000 £880 £480 £960
£17,000 £960 £510 £1,020
£18,000 £1,040 £540 £1,080
£19,000 £1,120 £570 £1,140
£20,000 £1,200 £600 £1,200
£21,000 £1,280 £630 £1,260
£22,000 £1,360 £660 £1,320
£23,000 £1,440 £690 £1,380
£24,000 £1,520 £720 £1,440
£25,000 £1,600 £750 £1,500
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Appendix three – Regulation of
personal accounts
The following is an update of section 4.6 of our response to ‘Security in retirement:
towards a new pensions system’, taking into account the decision to structure personal
accounts as a multiemployer defined contribution occupational scheme. It also allows
for the delivery authority.
Advice and information disclosure
Purpose Comment Regulator
Regulated advice on Ensure regulated Training and FSA
pensions in general advisers are competence.
and the extent to competent to discuss
PA is a non
which this should PAs.
regulated product
take into account
Ensure regulated which impacts on
personal accounts
advisers understand FSA treatment.
(PAs)
how they should
Adviser should
reflect PAs in their
highlight 3%
broader advice.
employer
contribution, but
we strongly
oppose any RU64
style charge
comparison
Generic advice on Protect customers by Not currently Await
personal accounts developing considered a outcome of
standards. regulated activity the ‘Thoresen
by FSA. Review’ to
Ensure there is a
determine
clear distinction Advice on joining
regulator role
between generic and an occupational
regulated advice and scheme is not
that consumers regulated by FSA.
understand the
FSA currently
difference.
requires status
disclosure within
IDD if regulated
advice being
considered.
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Information Protect consumers by Occupational Delivery
provision regarding developing standards schemes are authority may
personal accounts / good practice. subject to less wish to seek
regulation over approval from
Seek to improve
the provision (as DWP, FSA or
financial capability.
opposed to the TPR.
Comparisons with content) of such
other forms of materials.
pensions disclosure.
Parallels with
Need to clarify who Category C
bears the risk of adverts.
individuals making
See also regular
the wrong choices on
statements.
the basis of
information provided.
Advice to employers Ensure advisers are Currently not If to be
on pension options competent to advise regulated. regulated,
for their employees on options including FSA for
How this is
including how personal accounts, broader
handled could
personal accounts pros and cons of pensions
impact on the
are factored into this alternatives, and on advice.
extent of levelling
employer
down.
responsibilities.
Information on Ensure customers Currently, parts Delivery
options during have appropriate, of industry follow authority may
course of personal timely information to ABI Best Practice, seek approval
accounts make informed for example on from DWP /
decisions, for open market FSA / TPR
example at options.
retirement.
Provision and administration of personal accounts
Purpose Comment Regulator
Prudential regulation Financial stability and Fixed price FSA could
of those providing hence confidence in contracts create supervise
services under the market. expense overrun regulated
contract to the risks and the need entities.
delivery authority for capital
(this could include a backing. Extent of
clearing house mismatch will
function – see later) indicate level of
risk.
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Purpose Comment Regulator
Prudential regulation Financial stability and Depending on how Provisions
of delivery authority hence confidence in contractors are within
itself the market. paid, delivery legislation?
authority could
have major
requirement to
raise capital.
Could be covered
by solvency
legislation.
Regulation around Once determined, Delivery authority
any price cap. ensure personal should be required
Assume this will not account customers to undertake
be set in legislation are not charged external audit.
but derived from above publicised
tender process level.
Compliance of Customer confidence Delivery authority
contractors with and ease of choice of should be required
other prescribed provider. to undertake
design features / external audit.
limitations (eg
funds)
Monitoring of Avoid individuals Will be function of HMRC has an
premiums against making major clearing house interest in
any contribution financial decisions the tax
limits into pension without advice. point.
accounts (eg Possibly to avoid
£3,000) excess tax relief.
Tax reclaim Ensure correct Administrator HMRC
amounts claimed / under contract to
awarded. delivery authority.
Investment of Consumer protection Chain of events to
contributions / confidence that monitor across
instructions being contractors.
dealt with Delivery authority
appropriately. to undertake
external audit.
Regular statements Customer FSA specifies for TPR
/ information information on PP. Disclosure
progress of their regulations cover
account. occupational.
SMPI adds
requirements for
DC. Major benefit
in consolidated
rules.
Money laundering Avoid opening up FSA
potential for criminal
activity.
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Purpose Comment Regulator
Data protection Ensure customers’ DPC
rights are not
breached.
Systems and Confidence in overall FSA if any
controls industry. contractors
are
regulated
Fund management
Purpose Comment Regulator
Appropriate fund Ensure all funds on Function of the TPR
design offer are appropriate DA. Particularly
for the target important for
audience and for an default funds.
effectively non
advised purchase.
SRI and ethical Ensure funds TPR, EIRIS
funds described as such
invest accordingly
Operation of Ensure funds operate FSA if carried
lifestyling lifestyling in line with out by
descriptions. regulated
organisation
Employer responsibilities
Purpose Comment Regulator
At outset, satisfying the Crucial in ensuring Aim is self TPR
‘good scheme test’ to employees are certification
exempt requirement to given their
automatically enrol entitlements.
some or all employees
into Personal Accounts
Reviewing exemption Crucial in ensuring As above. TPR
on an ongoing basis employees are
given their
entitlements.
Appropriate feed of Ensure employers Without TPR
employee and employer pass on correct reconciliation,
contributions to PA amounts on a most which could
timely basis. be reported is non
payment.
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Purpose Comment Regulator
Feed of information on Ensure employer We believe it is TPR
membership of good communicates on likely that a
existing schemes, an accurate and central register will
membership of timely basis to be required.
personal accounts, opt ensure individuals Delivery authority
outs etc do not ‘slip to produce and
through the net’. maintain.
Regulation of Clearing House – There will still be a need for a clearing facility if the
Delivery Authority awards contracts to more than one administrator. It will be more of a
background admin function as members will not be choosing a branded provider. We
regard it as an admin function.
Automatic enrolment
Purpose Comment Regulator
Operation of automatic Ensure customers Delivery TPR
enrolment processes are given their authority should
rights by endeavour to
employers. deliver this.
Operation of opt out Ensure customers Delivery TPR
procedures are given their authority should
rights by endeavour to
employers. deliver this.
Three yearly re Ensure customers Delivery TPR
automatic enrolment are given their authority should
rights by endeavour to
employers deliver this.
Compliance with Ensure customers FSA
Distance Marketing are given their
Directive DMD rights
Updated 16.3.07
AEGON 20 March 2007