How much wriggle room do we need?

28 May 2007

What level should the contribution cap for personal accounts be set at?

The DWP reckons setting it at £5,000 a year gives people some needed wriggle room. So, if they return to work after a period out (say, because of maternity leave) they can make an additional one-off payment. Or if investment returns dip, people can compensate by making extra contributions to make sure they are still on track for their targeted retirement income.

But, in reality, people don't work like that. Most new parents returning to work won't have any spare cash to spend on pensions. And people's natural reaction when investment markets fall is to say 'don’t throw more good money after bad' (even though investing when markets are low probably makes sense).

Personal accounts are a regular payment plan for low and moderate earning employees, and should be designed as such. Someone earning the average national wage of £23,000 will pay in £1,440 a year (assuming a contribution rate of 8% of band earnings). 

Setting a more realistic contribution cap of £3,000 gives these people ample wriggle room to pay in a little bit more when times are good. (And remember, the majority of the personal accounts target market will earn less than £23,000.)

If the contribution cap is set higher we run two risks. First, personal accounts could turn into a rich person's plaything, and plans set up for high earners' husbands or wives. Second, personal accounts could encroach on the existing pensions market; a higher contribution cap means it's easier to switch existing schemes wholesale into personal accounts.

We need to keep the focus on the target market and design personal accounts to fit in with their lives. So, let's get the basics right, and avoid these risks.

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Sticking to our principles

1 May 2007

Most of us like to think we’re fundamentally good citizens. We have our principles and we stick to them. Well, apart from New Years resolutions. And because of this, we probably don’t enjoy following lots of detailed bureaucratic rules. On the other hand, is everyone else as principled as we are? Maybe detailed rules have a place - for other people.

Last week the Financial Services Authority published an update on where it is in its move towards “more principles based regulation” with less reliance on detailed rules. This is very welcome – lately, we've not had an FSA rulebook - more a rules library.

The big benefit from a more principles based approach is firms, like AEGON, can adapt their processes and practices to better meet their customer needs. We can be more flexible and innovative in our approach to product design, communications and customer service. The FSA will still take an interest in all of this, but will focus on the outcomes for our customers, not the detail of how we got there.

Of course, these new flexibilities come with responsibility. Without detailed rules to keep us right, we all need to take more responsibility for making sure what we’re doing truly lives up to the principles. And senior management need to be able to tell this is happening right across the business.

The FSA won’t be scrapping its rulebook entirely. Some rules are set at European level. Others remain needed, for example where consistency across the industry is important for customer understanding or protection.

We’ve already had some practice working with principles – Treating Customers Fairly is about principles, not rules. We’ve seen the benefits this can bring to us and our customers. The FSA is giving us the opportunity to take this wider.

Steven Cameron 

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Important note

This blog provides the views of our industry lobbying team. The views are the opinion of the person writing the entry of the blog and don't necessarily represent the views of AEGON in the UK. They are based on their interpretation of industry developments and their current understanding of UK proposed and actual legislation, and should not be interpreted as recommendations or advice.