AEGON is calling on the Personal Accounts Delivery Authority to make it clear to potential Personal Account customers that charges may have to rise in future.

Following Paul Myners’ announcement that PADA will consult on Personal Account charges next year, AEGON highlights the financial management challenges it will face in setting up the scheme. 

AEGON says Personal Account running costs will be affected by differences between actual and assumed employer and employee behaviour. Unknown factors, such as whether opt out rates will match expectations, could mean initial charging assumptions are over optimistic. If this leads to costs exceeding charges AEGON believes the scheme rules should allow charges to rise to avoid the risk of calling on tax payer subsidies.

AEGON also points out the potential for a timing mismatch between charges received and costs incurred. PADA faces upfront costs in establishing the Personal Accounts scheme which may only be recouped over the longer term.  And AEGON says undue focus on keeping charges low at the outset could build up financial pressures for the future with later joiners facing higher charges.

Any mismatch between costs incurred and charges collected will have to be financed by borrowing.  According to analysis carried out by the Pensions Policy Institute, the mismatch varies dramatically with the charging structure chosen, the most extreme mismatch coming from a flat annual management charge (amc) structure.  AEGON suggests a combination of amc and contribution charge more closely reflects the timing of underlying costs and should minimise possible cross-subsidies from general taxation or the need for charges to rise in future.

AEGON believes these issues, and their potential future consequences, should be fully understood before key decisions are taken on the level and shape of charges. 

Steven Cameron, head of business regulation says:

“Personal Accounts are a huge social experiment which must work fairly for initial and future members and the tax payer.  Getting the financials right will be a key part of the success.  Rather than be influenced by government aspirations over charge levels, PADA must weigh up all the issues before setting both the level and shape of charges.  We must avoid letting the scheme get into financial difficulties as this would further undermine public confidence in pensions.  Giving PADA the power to increase charges if necessary will be a vital component. The risk of having to do this can be reduced by building margins into the initial charges.

“But it would go against the spirit of treating customers fairly, if people aren’t told of this possibility before they are auto-enrolled into Personal Accounts.  As we move towards implementation stage, the industry needs to work with PADA to get the best outcomes for all consumers.”

Notes to Editors

• PADA has been set up to oversee the design and implementation of Personal Accounts.  One of its responsibilities will be the financial management of Personal Accounts, including setting the shape and level of the charges.  It will be given executive powers in the forthcoming Pensions Bill to begin this process.
• In his evidence to the Work and Pensions Select Committee on 17 October, Paul Myners reported that PADA will be consulting on the level and shape of charges for Personal Accounts.
• The DWP’s White Paper, Personals Accounts: a new way to save, published in December 2006 said “The Government believes that personal accounts could deliver an AMC possibly as low as 0.5 per cent in the short term and below 0.3 per cent in the long term.”
• Pensions Policy Institute “Charging Structures for Personal Accounts”, March 2007.  Under PPI’s central assumptions using a flat amc, initial borrowing would be around £1.3bn repayable over 18 years.
• AEGON UK has assets under administration of £52.3 billion and employs around 4,500 staff.  AEGON UK is part of the AEGON group, which is one of the world’s largest insurers and has assets under management of £245 billion.

For further information

Steven Cameron
Head of Business Regulation
T. 0131 549 3859
Steven.Cameron@aegon.co.uk

Margaret Robertson
PR Manager
T. 0131 549 6798 | M. 07740 897527
margaret.robertson @aegon.co.uk