The Department for Work and Pensions has today announced that the European Commission has confirmed automatic enrolment of members into contract-based schemes, such as Group Personal Pensions (GPPs), from 2012, is consistent with EU law.

Auto-enrolment is necessary, under pension reform legislation, if employers are to be able to continue to offer existing pension schemes as an alternative to personal accounts. However, it was feared the European Distance Marketing Directive and Unfair Commercial Practices Directive would prevent auto-enrolment into contract-based schemes.

Rachel Vahey, AEGON head of pensions development, says:

“Some three million people in group personal pension schemes can rest easier now this major roadblock in the implementation of UK pension reform has been removed – it is a very positive step forward. This announcement confirms the Government wants GPPs to play a key role in pensions beyond 2012. Denying contract-based schemes the ability to implement automatic enrolment could have forced their closure, leaving millions worse off in retirement. This would have been completely against the Government's stated aim of protecting good existing schemes and targeting personal accounts at people without access to one.”

Average contributions to GPPs are higher than the levels proposed for personal accounts. If employers close existing schemes, or level down contributions to the personal accounts rate, employees could be significantly worse off in retirement.

Figures produced by AEGON show GPP members could see five years of saving wiped off their pension in such a case. For low to moderate earners, the pension income paid out after 25 years of saving into a personal account is roughly the same as the income paid after 20 years saving into a typical GPP.

Vahey continues, “We have to remember the aim of pension reform is to get more people in a fit financial position to move into retirement. This means more people saving more money in good existing pension schemes or, where there isn’t one, in personal accounts. We look forward to working with Government on some of the more detailed points such as definition of pensionable earnings and design of default funds."

Notes to editors

• There are 2.6 million active members of group personal pension or stakeholder pensions in the UK – Source The Pensions Regulator, November 2006.
• For someone earning £15,000 a year, the pension income available after 25 years in a personal account scheme is £3,031 pa and after 20 years in a GPP is £3,087 pa. This assumes contributions of 8% of band earnings for personal accounts and 9% of basic earnings for GPPs, 6% investment growth, 4% earnings growth and charges of 0.5% amc for personal accounts and 1% amc for GPPs. Annuity figures are based on a male aged 65 at retirement with a 5 year guarantee and RPI escalation.
• The default contribution level in personal accounts will be 4% employee contribution, 3% employer contribution of earnings between £5,035 and £33,500. The average contribution rate to AEGON’s GPP schemes is 9%.
• With over 2 million customers in the UK, AEGON is one of the country’s leading life and pensions providers. 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.

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