The personal accounts delivery authority (PADA) can’t afford to compromise on sustainability when choosing a charging structure for personal accounts says AEGON, one of the UK’s leading pensions providers.

In its response to PADA’s charging structure consultation, AEGON urges PADA to start with a charging structure that delivers financial sustainability. It can then seek to optimise against PADA’s other criteria of maximising participation and producing good, fair retirement outcomes for members.

Financial sustainability can only be achieved by using some form of upfront or contribution charge according to PADA’s analysis and modelling by the Pensions Policy Institute.

AEGON believes a charging structure that combines a modest percentage contribution charge with an annual management charge will provide financial sustainability by most closely reflecting the timing between costs incurred and charges collected. AEGON says this structure would be fair to both initial and future members and believes people will accept a dual charging structure in return for greater scheme security.

Financial sustainability is crucial in providing member security and AEGON believes this will have more of an impact on participation rates than either the level or shape of the charging structure. Failure to set a sustainable charging structure at outset could mean charges having to rise in future, calls for tax-payer subsidies or, in the extreme case, the scheme closing says AEGON.

AEGON says PADA will have to balance between the three target criteria as no charging structure provides the optimum solution for all three.

AEGON urges PADA to conduct extensive testing to assess the impact of actual experience differing from assumptions on investment performance, initial participation, persistency and contribution rates and, to allow proper debate to publish both its assumptions and testing results.

Steven Cameron, head of business regulation, says:

“There’s no ideal charging structure that will give the best results against all PADA’s criteria so it will have to make trade-offs. But scheme sustainability is black and white, not a matter of degree, as we can’t afford another crisis of confidence in the savings arena. It makes sense to address this first and a combination of contribution charge and annual management charge is clearly the best way to do so.

“PADA’s initial research showed consumers would prefer a single charging structure. But, given the choice, I believe people would welcome a dual charging structure if they understood it gave them more security by avoiding the scheme getting into financial difficulties. While we welcome this important consultation, we shouldn’t overstate the importance of the charging structure on influencing member participation. Affordability and confidence in the long term viability of the scheme will be much stronger drivers.”

Notes to editors

• PADA has been tasked with setting up the personal accounts scheme. It will have a two-stage role, advisory and executive. During its advisory stage, PADA will provide advice and make recommendations to the Government on various options such as payment systems, account maintenance and member communication. Sometime in 2008, PADA will move into the executive stage which is expected to run to 2012. It will then take on responsibility for building the infrastructure for personal accounts. PADA's full responsibilities include minimising the burden on employers, minimising the impact on high-quality pension provision, optimising participation and contributions in the target group, setting the level and shape of charges and an appropriate range of fund choices.
• PADA launched its charges consultation in January 2008. The consultation is about the structure, not the level, of charges and closing date for responses is 22 April 2008. PADA is initially considering four options – annual management charge (amc), contribution charge, joining fee and contribution charge with amc. It has asked respondents to assess possible charging structures against criteria of (fairness of) retirement outcomes for members, participation and sustainability. When it has considered responses PADA will make recommendations about the most appropriate charging structure to the Secretary of State for Work and Pensions.
• There is strong 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. AEGON believes undue focus on a flat annual management charge structure or on keeping charges low at the outset could build up financial pressures for the future which could push up the costs for members at some later date.
• PADA will make recommendations on charging levels when the design of the personal accounts scheme is finalised, costs incurred have been identified and contracts have been put out to tender.
• PADA will issue further consultation papers on investment options and scheme rules later this year.
• 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

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

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