the pensions crunch: proposals for change

8/9/2019 The Pensions Crunch: proposals for change

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AEGON Pensions ManifestoThe Pensions Crunch proposals for change

April 2010


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1. Foreword

The starting pistol has been fired in the 2010 general

election campaign and the key battle lines are being

set out. While the economy, and in particular action

to reduce public debt, is likely to be at the forefront of

politicians and voters minds, we at AEGON believe

pension policy should play a key role in the election

campaign. And the public agrees. In a YouGov survey,

conducted for AEGON in late March, 81% of

respondents thought pensions were more important

(38%), or of at least the same importance (43%), in

this general election compared to the election f iveyears ago1. With huge levels of undersaving for

retirement and growing divisions between public and

private sector pension provision, we believe the

incoming Government will have to make some tough

decisions, even in its first 100 days.

Longevity isnt a choice for Britain, its a certainty.

The question isnt whether we pay for it, or when, but

how we start to pay for it now. That means making

sure the investment in our national old age is made as

effectively as possible and getting genuine buy-in

from the broadest possible cross-section ofindividuals, businesses and taxpayers to each bear a

fair share of the burden.

Otto Thoresen

Chief Executive

AEGON UK

1 Figures from YouGov plc. Total sample size was 2131 adults.

Fieldwork was undertaken 24 26 March 2010. The survey was

carried out online. The figures have been weighted and are

representative of all GB adults (aged 18+).

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2. Executive Summary

The recession has turned the spotlight onto the UKs

growing public debt, but the long-term pressures from

an ageing population have been apparent for some

time. AEGON believes its vital that measures which

look to plug the short-term hole in the public finances

do not come at the price of neglecting the longer-

term need to tackle the longevity challenge.

The number of centenarians is expected to rise from

just 12,000 today to more than 280,000 by 2050, and

the cost of dealing with an ageing population hasbeen estimated at 300 billion a year by 20252 - more

than we currently spend on health, education,

defence and policing combined.3 That is without

taking into account the huge liability on future

taxpayers from unfunded public sector pensions.

Household finances all too often mirror this picture of

public debt. As many as 13 million people are not

saving enough for retirement with more than 9

million saving nothing at all.4 At the same time,

household debt is at record levels of around 1.5

trillion, and families make 187 million in interestpayments every single day.5 The tax rises likely to

follow the election whoever wins will add to the

strain on family budgets.

The reforms put in train by Lord Turners Pensions

Commission will even if they succeed in their aims

go only part of the way to addressing the savings

gap. Without further action, millions of people will

continue to be condemned to poverty and state

dependence in old age. We think thats unacceptable.

Action should not be postponed simply because the

pressures are long-term in nature. On the contrary,

its precisely because it takes time to build up assets

that action is needed now.

At AEGON, we believe getting people to save more is

a true win-win scenario. Asset ownership has

important benefits to individuals and families, most

obviously in terms of their ability to withstand changes

in their economic circumstances. At the same time,

saving and investing is key to long-term sustainableeconomic growth, and a nation of savers is likely to

make less call on income-related benefits in years to

come.

We need a comprehensive rethink of how to get

people saving more and help them make the most of

their assets in later years. A piecemeal approach

sends out the signal that the goal posts can be

constantly moved. The recent decision to restrict

pensions tax relief for higher earners is particularly

damaging and sends out the wrong message when we

should be encouraging long-term saving.

We call on the next Government to build on the

consensus around pensions reform to create a

framework which gives people the encouragement

they need to save more.

2 NESTA (2009)3 HMT (2010)4 ABI (2008)5 Credit Action (2010)

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Our recommendations are:

In the first 100 days

I Call an immediate halt to the salami slicing of tax

relief on pension contributions. If people are going

to save for the long term, they need confidence that

the goalposts arent going to be continuously

moved. Recent changes risk doing grave damage to

public confidence in pensions, way beyond the high

earners at whom the measures are targeted.

I Review the arrangements for automatic enrolment

into workplace schemes from 2012. Engaged

employers are vital to making pensions reform work

and for getting people to save more than the bare

minimum. But as matters stand, the introduction of

automatic enrolment risks imposing a burden which

will be intolerable for many employers, especially at

the smaller end of the scale. There are also real

questions as to whether automatic enrolment is in

the best interests of some groups of workers.

I Commission an urgent review into public sector

pensions to bring unfunded liabilities under control.

Its not reasonable to expect private sector workers

to save a significant proportion of their income

while they and their employers are also contributing

an ever greater amount through their taxes to the

pensions of public sector workers.

Over the lifetime of the next Parliament

I Lay the foundations for a new savings culture.

Constant tinkering with tax allowances and reliefs

sows confusion and uncertainty. What is needed is

a one-off review of incentives not just direct

financial incentives, but behavioural approaches

to create a framework which encourages long-term

asset accumulation.

I Rethink the retirement landscape. Retirement is nolonger an event but a process. Our research shows

peoples attitudes have adapted to this, but the law

simply hasnt kept up6. It now acts as a constraint

rather than an enabler to the lives people want to

lead. A comprehensive review of the tax rules,

services and advice for older people is needed to

bring them into line with changing attitudes and

lifestyles.

I Ensure consumers have access to the advice and

guidance they need. The next Government should

ensure proposals for full national roll-out of the free-to-use Moneymadeclear financial guidance service

are implemented. Existing workstreams aimed at

simplifying commercial advice propositions should

be energetically pursued.

There is a real and urgent need for reform if we are to

ensure a sustainable future for all. This paper outlines

the current pensions landscape, the key drivers for

change and outlines AEGONs recommendations for

how the next Government can deal with the

challenges of an ageing population.

6 OPM (2009)

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3. Background

The UK pensions industry is one of the most mature in the world. It is a significant contributor to the UK

economy, as well as being one of the key employers in the UK.

Recent statistics place the value of UK pension assets as 1,250bn.

UK Pension Assets 2008 (bn)

Source: IFS (2010)

The demand for UK pensions solutions will be driven by two key markets in the future. Employers have

traditionally set pension provision at the core of their employee benefit offering to their workforce, and therecent automatic enrolment pensions reform will, hopefully, increase this trend. The other key market is the bank

of babyboomers who are now approaching retirement. This sway of population will lead to an increased demand

for at retirement financial products

a. The Drivers for Change

The ageing society and the public finances

Its no secret that the UKs public finances are in a parlous state. We approach the general election with an

unprecedented 167 billion budget deficit and all the main political parties putting forward rival visions for how to

cut the deficit without jeopardising economic recovery. The global financial crisis and the ensuing recession have

undoubtedly exacerbated the situation; but even before the run on the Rock or the collapse of Lehman Bros, it

was clear the 21st

century would see the public finances come under significant strain.

Occupational pensions

Pension insurance contracts

Personal pensions

815

175

260

Watson Wyatt estimates the UK at-retirement market for financial

products will grow by over 60 per cent during the next five years to

23.1 billion, from 14.1 billion at the end of 2008.

Source: Watson Wyatt (2009)

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The fiscal situation in which the country finds itself demands tough action. The focus is understandably on

measures which look to plug the short-term hole in the public finances. But to prevent future liabilities getting out

of control, the next Government also needs to face up to issues which will come to bear further down the line.

In common with most other industrialised countries, the UK faces the prospect of an ageing population.

Advances in nutrition and medicine are making it increasingly commonplace for people to live well into their

eighties and nineties. In 2007 the number of people in the UK above state pension age exceeded those under 16

for the first time.7 Already a third of the population is over 50 and by 2025 this is expected to rise to a half. And

the number of centenarians is projected to rise from just 12,000 today to more than 280,000 by 2050.8

People aged over 100

Clearly, this is something to celebrate. But if were going to make the most of the opportunities this brings as

individuals and as a society we need to think about the consequences of these changes.

There are major knock-on effects for the public finances. Obviously, older people have calls on state pensions

and other entitlements. They also tend to use public services more than people of working age. It is estimated

that the cost of an ageing society on the public purse will reach 300 billion by 2025 because of the rising cost

of health care, pensions and other benefits.9 This is more than we currently spend on health (122bn), education

(89bn), defence (40bn) and public order (36bn) combined, and roughly twice the total take from income tax

(146bn).10

`

300,000

2010 2020 2030 2041 2051

250,000

200,000

150,000

100,000

50,000

0

12,00022,000

59,000

155,000

281,000

Year

Projected numbers

7 DWP (2009)8 ONS (2009)9 NESTA (2009)10 HMT (2010)

HM Treasury estimates that the UK state pension scheme represented a total

liability of 1,170 billion to the Government in 2003, the latest year for which

an official figure is available.

Source: ONS (2010)

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An ageing population isnt just about people living longer. Its also a function of the large post-war baby boom

generation tending to have fewer children than their parents. There were 995,000 children born in 1947 at the

start of the baby boom, and 980,000 in 1964 towards the end, but by 1977 this had declined to 630,000. 11 This

means, broadly speaking, that as the baby-boomers retire, the workforce is not replacing itself and the old age

support ratio increases. Consequently, the increased public expenditure has to be met by a smaller pool of

working-age people the cohort effect. If action isnt taken it opens up the prospect of significant tax rises for

future generations which will damage the competitiveness of the UK economy.

Changes in the UK old age support ratio, 19802030

Source: DWP (2009)

The generous final salary pensions still available to many public sector workers also pose problems for the

public accounts. Most of these pensions are unfunded which means the cost will be met from general taxation

on a pay as you go basis rather than from a fund built up through investing contributions. The most recent

official estimate puts unfunded public sector pension liabilities at 770 billion but other estimates have put them

at more than 1 trillion.12 Either way, this represents a significant cost to future taxpayers.

Changing approaches to retirementAs people live longer and in most cases stay healthier and more active longer, too it makes less and less

sense to talk about people retiring at a given age. People no longer go overnight from being of working age tobeing a pensioner. Retirement is becoming less a one-off event and more a phased process.

People dont always want to stop working the moment they hit 65. There are a number of reasons for this. Some

will take a look at their financial position and decide they will need to continue to work to support the sort of

lifestyle they want in their later years. Others enjoy the social aspect of work, or want to stay active which is

generally also thought to bring significant health benefits.

11 ONS, cited in Willetts (2010)12 Towers Watson (2010a); CBI (2010)

21980

2.5

3

3.5

4

4.5

5

1985 1990 1995 2000 2005 2010 2015 2020 2025 2030

Year

Supportratio


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Research published by AEGON last year pointed to a mismatch between peoples expectations of retirement and

the resources available to meet those expectations. In particular, people frequently underestimate how long

theyre going to live and overestimate how long their savings will last.13

The existing framework makes it very difficult for people to go about bridging that gap. Even those who have

been able to put enough capital aside during their working lives, often find the rules governing how they can

draw down their assets inflexible. Put simply, the environment has not kept pace with changing patterns of

working and saving, and peoples changing attitudes to this phase of their lives.

Personal savingsPeople are already coming up against the consequences of not saving enough for their retirement. Its a sad fact

that there are around 9.6 million working people saving nothing at all and another 3.8 million not saving

enough to meet the costs they are likely to face in their later years.14 This accounts for approximately half of all

people in work. The challenge of bringing about a change in the financial habits of such a large group is a

daunting one.

Without reform, this situation is likely to get worse still. The decline (other than in the public sector) of defined

benefit pensions has left millions of workers with significantly less valuable employer contributions. Members of

defined contribution schemes also take on a greater share of the risk from the ups and downs of the stock

market. In too many cases, employees do not have access to any sort of workplace pension.

Average employer contribution rates in different types of pension scheme

Source: ACA (2009)

13 OPM (2009)14ABI (2008)

30

DB GPPs DC

25

20

15

10

5

0

Year

Percent

DB =

GPP =

DC =

defined benefit

group personal pension

defined contribution

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Shift from defined benefit to defined contribution schemes

Source: Towers Watson (2010b)

Nor are pensions the only issue. Saving more generally has been in decline in the UK for some time. Figures

produced by the OECD suggest that in 1995 British households were saving 6.7 per cent of their household

income. By the time the financial crisis hit in 2008, not only were they not saving anything at all, rather they were

borrowing to the tune of 4.4 per cent of their income. The UKs record in this respect is worse than many

comparable nations even the supposedly profligate United States.15 While there have been signs of

improvement since the recession took hold, this largely reflects paying down debt rather than generating positive

savings. There is no guarantee that as the economy picks up, people will not return to their free-spending habits.

15 OECD, cited in Willetts (2010)

120

Dec-99 Dec-04 Dec-09

100

80

60

40

20

0

Percent

defined contribution

defined benefit

5 33 39

95 67 61

Key fact: Reduction in Defined Benefit schemes

I 87% of private DB now closed to new members

18% of these closed to future accrual

A third of these closed schemes are currently under review

I Funding deteriorates

91% in deficit

Average ongoing funding level at 79%

A fifth have recovery periods of over 10 years

Source: ACA (2009)

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Employer pension provision in the UK

Source: DWP (2010)

Its clear we cant continue indefinitely running down our wealth in this way. Sustainable economic growth will

depend on reversing this and generating a solid foundation of savings on which to base real investment. Saving

also gives people a cushion against unforeseen events or changes in their individual circumstances as well as

those, like retirement, which it is possible to plan for. There is also evidence to suggest that the very fact of

having an asset base to fall back on promotes a sense of well-being.

The UKs debt crisis in figures

I Total household debt in the UK stands at nearly 1.5 trillion equal to

around 30,000 for every adult.

I UK households pay out 187 million a day in interest payments.

I The average household spends 2,710 a year equivalent to 15 per cent of

net income just to service their debts.

Source: Credit Action (2010)

No pension provision

Less than 3% from employer

3% + from employer

750,000

280,000

270,000

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b. The Possible SolutionsVarious proposals have been put forward from Government and others to address the longevity challenges. For a

summary of the main parties policies on pensions see The Pensions Policy Institute briefing note which can befound at http://www.pensionspolicyinstitute.org.uk/default.asp?p=124&publication=0266&

Some of the possible solutions in play are:

Proposal AEGON view

1. Pensions reform

Many of the proposals from the Turner Report are

now being, or are on their way to being,

implemented. The main elements are:

I Improved eligibility for the Basic State Pension,

with particular benefits for carers who are more

likely to have broken National Insurance

contribution records

I Move to a flat-rate State Second Pension (S2P)

and end contracting out for defined contribution

schemes from April 2012.

I Phased increase to the State Pension Age, from

65 to 68

I Automatic enrolment (with the right to opt out) for

most employees into a workplace pension

scheme, with mandatory employer contributions

I The creation of the National Employment Savings

Trust (NEST) to cater for low- and medium-earners

whose employers do not have adequate

alternative provision.

These reforms will go some way to tackling the problem of

undersaving, however the minimum levels of saving put forward by

Turner will generate fairly low levels of retirement saving. A median

earner saving from the age of 25 at the minimum levels, should

receive a retirement income equivalent to 45% of their pre-

retirement wage, inclusive of state entitlements. However there are

significant questions over the ability of the reform package to deliver

even this relatively modest ambition.

The Pensions Commissions report estimates overall contributions of

roughly double the minimum would be required to achieve a more

appropriate two-thirds replacement ratio.16

Concerns remain about the impact on good existing pension

schemes. Automatic enrolment is an excellent example of using the

tools of behavioural economics to overcome apathy. But its

introduction on an economy-wide scale inevitably entails risk.

If automatic enrolment succeeds in boosting take-up of pensions,

employers who already contribute to their employees pensions will

face a significant increase in labour costs. This may lead them to trim

their workforce or it may lead them to reduce their contributions to

the minimum levels, leaving millions of people worse off. The

additional administrative burden will also drain employers resources.

The DWP estimates the administration costs of 443 million in the

first year and 130 million per year thereafter.17

And we dont know how many people will opt out of the new

arrangements. With taxes likely to rise after the election people wi ll

have less money and may be sceptical of locking money away until

retirement.

To achieve the two-thirds replacement ratios Government will need a

thriving private market alongside NEST. We must ensure employers

can continue with their existing schemes with the minimum effort. A

typical private workplace scheme already provides higher than

minimum contributions and offers additional benefits such as life

cover and income protection. It wont constitute a public policy

success if extending coverage means those who are saving

adequately now lose out.

16

Turner et al. (2006)17 DWP (2010)


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Proposal AEGON view

2. Early access to pensions

There is growing interest in allowing individuals

access to some or all of their pension funds before

they retire. The idea is that having to lock assets

away until retirement puts many people off saving

altogether. By allowing early access in particular

to the portion of the fund currently available as tax-

free cash at retirement to pay for specific

purchases such as the deposit on a first home, we

could therefore encourage people to start saving.

We agree with a recent study by the Social Market Foundation18

that the evidence for allowing early access to pension funds is

inconclusive. Once the impact of withdrawals is taken into account,

it is unclear whether such a move would increase net pension

savings. Even if this were the case, it could easily come at the

expense of rainy day saving (in ISAs for example). The recent

economic downturn has highlighted that this sort of saving can be

just as important for many families.

3. Abolition of the age 75 rule

At present, DC pension funds have to be converted

to an income (usually in the form of an annuity) by

the age of 75. The Treasury argues that the purpose

of a pension and the justification for generous tax

relief on pension contributions is to secure an

income in retirement. Others contend that this rigid

approach constitutes a disincentive to save in a

pension and inhibits people who wish to continue to

accumulate assets after that age. On this argument,

raising the compulsory annuitisation age, or

abolishing it altogether, would therefore encourage

people to save more and for longer.

In AEGONs view, focusing on the 75 at 75 rule on its own isnt

enough. The way annuitisation works needs to be reviewed and it

needs to be made easier for people to continue working for longer

where they wish to do so.

4. Working longer

One way of helping people finance their retirementmore effectively is to enable them to spend more of

their life in work, and less in retirement. Successive

pensions reforms have recognised the need to do

this as longevity has increased. The Pensions Act

1995 equalised the state pension age at 65 for men

and women, while the Pensions Act 2007 put in

place a phased increase to 68 by 2046.

More recently, there have been proposals to

increase the state pension age further and/or faster,

and to raise or abolish altogether the default

retirement age which currently enables firms to

force their employees to retire at 65.

While we agree in principle that the default retirement age needs to

go, there needs to be serious thought given to how this will affectthe provision of employee benefits, including pensions. Rather than

consider the abolition of the age 75 rule and the issue of working

longer separately, though, there needs to be a comprehensive

rethink of the choices people face as they approach retirement and

beyond, so that people are able to plan much more ef fectively and

make better use of their assets than is often the case at present.

Further increases to state pension age need to be considered

carefully to make sure they do not have an unfair impact on future

retirees, especially the poor and those in regions with lower life

expectancy.

18

SMF (2010)

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Proposal AEGON view

5. Changes to pension tax reliefThe Government has recently severed the long-

standing link between the top rate of tax an

individual pays, and the level of tax relief on

pensions contributions. Given the fiscal

predicament in which the Government will continue

to find itself whoever wins the election, there is a

danger that now the link has been broken, the

temptation to make further incursions will prove

very strong. Some have proposed equalising tax

relief at (say) 30 per cent for all pensions

contributions as a means of drawing a new line in

the sand.

Equalising tax relief (at a level above the current basic rate) issuperficially attractive it would give basic rate taxpayers an added

incentive while removing the perceived unfairness of higher-rate tax

relief. But it seems that very little analysis has been done on how

this would affect peoples savings habits and in particular how it

would interact with other savings vehicles with different incentive

structures. Nor is it likely, in the absence of a clear cross-party

statement of policy that most people would believe this was the end

of the matter. It is an option which merits consideration but

crucially this would need to be examined alongside other options.

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AEGON believes many of the measures set in place in the past for pensions are now unsustainable and a more

radical approach is needed to solve the pension crisis.

We need to think about savings and retirement in the round rather than tackling the issues piecemeal. This

should involve a comprehensive rethink of how to get people saving more and help them make the most of their

assets in their later years.

A piecemeal approach sends out the message that the goalposts are subject to constant movement. The

Governments decision to restrict higher-rate pension tax relief is particularly damaging in this regard. While the

Government needs to tighten the fiscal belt, we think these restrictions represent profoundly misguided and

short-termist policy making.

It sends out the wrong message at exactly the time we need to be encouraging people to save more for their

later years. Research for AEGON in the wake of the last Budget revealed that 59 per cent of respondents think

that the Government should do all it can to maintain future generations retirement even if it means extra cost in

the short term, as opposed to just 11 per cent who who think that the next government should focus on saving

costs even if it means a drop in standards of retirement for future generations. 19

The same research indicated that around half of respondents thought it was either fairly or very likely there would

be further restrictions in future. This will undoubtedly have an effect on confidence in pensions. Employers will

think twice about the value to their business of generous pension provision, and employees will be less inclined

to commit a significant proportion of their income to long-term saving if they are worried future contributions will

be subject to higher tax charges.

Even the way the changes have been couched politically has conveyed the impression that pensions are some

sort of tax dodge for the rich, rather than a legitimate way for everybody to take responsibility and save for their

retirement.

The fact that these problems are long-term ones doesnt mean they can be put on the back-burner far from it.

The oldest of the baby boom generation is already reaching retirement and theres an urgent need to make sure

theyve got the right framework in place. And younger generations will need time to build up their assets so that

they can look forward confidently to their retirement. Our tests for dealing with our ageing population in times of

financial pressure are efficiency and consensus: efficiency requires action now rather than action later, and

consensus across all stakeholders, not just political parties requires specific action to address the barriers to

individual and business acceptance of what needs to be done. All of this points to the need to get started nowand put the groundwork in for a sustainable future. Failure to take action would simply be storing up trouble.

19 Figures from YouGov plc. Total sample size was 2131 adults. Fieldwork was undertaken 2426 March 2010. The survey was carried out

online. The figures have been weighted and are representative of all GB adults (aged 18+).

4. AEGONs proposals:

Key priorities for the incoming government

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This is what we think the next Government needs to do to get back on track:

In the first 100 days

Call an immediate halt to the salami-slicing of pensions tax relief

The Government should issue a clear and unequivocal statement that it will make no further changes to tax relief

until such time as it has conducted a full independent review of the savings landscape, including financial

incentives to save.

In the meantime, the hugely complicated rules due to come into effect next year should be shelved and replaced

by a simpler way of raising the same amount of revenue, via a reduced annual allowance. We believe this will besimpler and easier for consumers to understand and for business to administer, and can be set at a level such

that it would not affect the overall cost to the Exchequer.

It is vital to create the right environment around pensions ahead of the introduction of automatic enrolment in

2012. A commitment not to introduce further piecemeal changes to tax relief would provide a welcome signal to

consumers who are anxious that they will be caught by future restrictions.

Reconsider the arrangements for automatic enrolment from 2012

AEGON strongly supports automatic enrolment if it succeeds, it will transform pensions saving and make it the

norm for people in work to save for their retirement. This is tremendously important and so its tremendously

important to get it right.

Theres a serious danger that the way automatic enrolment is currently being implemented will damage its

chances of success. To make it more likely that employers will do more than the minimum and help put their

employees on a path to a more secure retirement, we think the Government should reconsider a number of

elements in the package:

I The quality test should be revisited. It needs to be made easier for existing schemes to continue calculating

pension contributions as a percentage of basic salary rather than the band of total earnings used to define the

legal minimum contributions. Failure to address this will pile a huge administrative burden on employers and

could eventually lead to the band earnings approach becoming the norm. This would leave the vast majority of

savers worse off than under a basic salary approach. The impact, ironically, would be most keenly felt by low

earners and women the very people pensions reform is supposed to help.

I The automatic enrolment trigger should be doubled from 5,035 to around 10,000. This would mean

taking around three million of the very lowest earners out of automatic enrolment, substantially reducing the

number of people at risk of being auto-enrolled into a means-testing trap. It would also significantly improve

the economics of NEST and enable it to repay its debt to taxpayers more quickly.

This shouldnt mean very low earners have no opportunity to save, though. We strongly support the Saving

Gateway the Government has set up to give saving incentives to just such a target group. The Government

should ensure that people excluded from automatic enrolment have access to this scheme, where this is not

already the case.


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I The upper age limit for automatic enrolment should be reduced to 55. Again, this mustnt mean older workers

being excluded altogether: they should have the right to opt in to a workplace scheme and benefit from the

same minimum contributions as everybody else. But the legislation as it stands risks automatically enrolling

people who are approaching retirement with little or no existing private saving. Those with less than 10 years

left in the workforce would be unlikely to save enough to take them clear of means testing, so that the income

they take from their savings in retirement will simply replace benefits or tax credits for which they would

otherwise have been eligible.

I The Government should consider exempting businesses with fewer than five employees, at least at the

outset of the new regime. This would mirror the current exemption for designation of a stakeholder scheme

and reduce the burden on small businesses. It would also make it far easier and less costly to policecompliance.

There is a review of the new arrangements scheduled for 2017 so all of these changes could be put in place on

a temporary basis subject to that further review.

Commission an urgent review of public sector pensions

The issue of public sector pensions is very often treated separately from the pensions reform agenda, and was

out of scope for the Pensions Commission. In AEGONs view, though, the issues are intertwined.

If automatic enrolment is going to succeed and businesses and individuals are going to make contributions

substantially higher than the legal minimum, Government will need to sell the benefits of pensions to individuals

and employers.

It is difficult enough in any event for Government to persuade people they need to save for their retirement, and

to tell businesses they should make more generous provision for their workers. That case is significantly weaker

while the public sector continues to award generous final salary pensions to its own employees, paid for in the

main by present and future taxpayers the same individuals and businesses who are being asked to take on

more responsibility and more risk.

The Government needs to send out a serious message that it intends to bring future costs under control, to

address the sense of inequality felt by many in the private sector. This goes further than making incremental

increases to scheme retirement age. AEGON supports calls for an independent commission to tackle the issue

on a cross-party basis. This needs to be established as soon as possible after the election so that its findings

can begin to be put in place ahead of the start of automatic enrolment.

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Over the lifetime of the next Parliament

Lay the foundations for a new savings culture

We need to get Britain saving again. We need more savings to underpin future economic growth, and families

need to save more for their retirement and to protect themselves against unexpected events.

The next Government should instigate a thorough re-examination of what motivates and inspires people to start

saving and keep on saving. This should include revisiting financial incentives such as tax relief, not just for

pensions but across the savings market. The aim should be to construct a new deal for savers, a lasting

settlement so that people know where they stand and can make important savings decisions with the reasonable

expectation that the rules of the game wont be subject to constant change.

Crucially, though, such a review needs to embrace the insights of behavioural finance. Automatic enrolment is

only a start: both Government and the financial services industry need to work harder to understand how

consumers think and behave in the real world. Public policy and product design are too often geared around the

notion of perfectly rational individuals acting perfectly rationally. Taking into account peoples quirks and

imperfections needs to be an embedded part of the process.


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Rethink the retirement landscape

We need a fundamental rethink to develop a retirement landscape more closely modelled around the idea of

retirement as a process rather than an event. Again, this means harnessing the insights of behavioural

economics, to help people understand their financial choices and get a much clearer idea of the risks they face

and the possible solutions.

People need simpler tax rules and more flexible financial products which meet their changing needs as they

move through the different stages of retirement. But they also need to be able to rely on effective public

services: high quality healthcare, suitable housing options, and reliable, accessible public transport. They need

the option to carry on working. And they need advice and guidance on how to make the most of their assets to

secure the highest possible standard of living for themselves and their families.

The Governments strategy for an ageing society20 makes a start on tackling these issues. Its vital the next

Government takes this forward energetically and puts in place the framework for delivering better outcomes to

tomorrows older people.

Ensure consumers have access to the advice and guidance they need

The key to people making better financial decisions is to make sure they have access to better information and

guidance. Starting in 2012, millions of workers across Britain will find themselves being automatically enrolled

into a pension scheme. While harnessing inertia makes sense, passively relying on it doesnt. This represents a

huge opportunity to both Government and the financial services industry to get people thinking seriously about

planning for the future and promote good savings habits. Making the most of this opportunity and ensuring that

pensions reform has a smooth landing will depend on going further than enrolment and getting into popularengagement. In turn that means making it easy for people to get the help they need to make informed decisions.

The development of the new Moneymadeclear service is a high priority. All the main parties are committed to a

full national roll-out and its important theres no backsliding on either the timescale or the guiding principles

behind the service that its free to use and does not recommend or sell specific products. These aspects are

crucial to engendering public trust in the service and should not be compromised.

Moneymadeclear wont be enough on its own to fill the advice gap in part precisely because it is not sales-

driven. In order to meet their financial needs, many people will at some stage need to buy a financial product

and will want guidance which goes beyond what Moneymadeclear can offer.

In many cases this will take the form of consulting an independent financial adviser. But this wont be right foreverybody. AEGONs groundbreaking 2008 research with Opinion Leader21 has led the way in pointing to the

need for a variety of different models of advice, sitting alongside existing models, to meet consumer needs. We

strongly endorse the ABIs calls for Government and regulators to work with the industry to facilitate the

development of a new simplified advice process.22

20 DWP (2009)21 AEGON (2008)22 ABI (2009)

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Page 18

The new Government taking charge on 7th May faces huge financial challenges to help the UK continue its road

to recovery. This will mean tough choices in the short term, particularly to manage public spending, raise much

needed revenue and correct the UK balance sheet.

While its vital these fiscal challenges are addressed, its also imperative we dont lose sight of the long-term

challenges the UK faces. Increasing longevity is to be celebrated, but it will mean both financial strain and

cultural challenges for future Governments and individuals. At AEGON, we are convinced that tackling the

pensions crunch is part of the solution to fiscal and economic stability, not an unwelcome additional cost

challenge. The right course is to use resources efficiently, and to shape policy so it tackles the barriers to

businesses, individuals and the public purse all contributing their fair share. Efficiency means starting now,

because a penny now could save a pound later. The barriers that need addressing are the signals people getfrom tax policy, the costs businesses face implementing the forthcoming reforms and the growing costs to the

Exchequer of unfunded public sector pensions.

Action we take today, even within the first 100 days of the new Government, can make a significant difference to

future generations. Creating a culture of saving supported by the right environment and tax rules takes time,

but is achievable. And breaking down artificial barriers to bring policy more closely in line with how people think

and behave will let people make the best use of their assets in retirement to match the income needs of longer

retired lives.

About AEGONAEGON is one of the UKs top 3 pension providers with more than two million customers and 56 billion assets

under administration. AEGON employs nearly 5,000 people in the UK. AEGON UK is part of AEGON, one of the

worlds largest financial services organisations, with a presence in over 20 countries. Its main markets are the

UK, the USA and the Netherlands.

For more information contact:

Margaret Robertson

AEGON Press Office

Tel: 0131 549 6798

Email: [email protected]

5. Conclusion


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ABI (2008): The State of the Nation's Savings(Association of British Insurers, November 2008)

http://www.abi.org.uk/Publications/ABI_Publications_The_State_of_the_Nations_Savings_c20.aspx

ABI (2009): ABI Savings Manifesto(Association of British Insurers, October 2009)

http://www.abi.org.uk/Publications/ABI_Publications_ABI_Savings_Manifesto_9de.aspx

ACA (2009): Pensions Trends Survey(Association of Consulting Actuaries, September 2009)

http://www.aca.org.uk/files/ACA_Pension_trends_report_No.1__1_September_2009-20090828155500.pdf

AEGON (2008): Distribution and advice research (AEGON, August 2008)

http://www.aegon.co.uk/downloads/pdf/Summary_phase_III.pdf

CBI (2010): Getting a grip: the route to reform of public sector pensions(Confederation of British Industry, April

2010)

http://www.cbi.org.uk/ndbs/press.nsf/0363c1f07c6ca12a8025671c00381cc7/d1c3c285facecb5a802576f600

2fd3c8/$FILE/Getting%20a%20Grip%20%20a%20route%20to%20reform%20of%20public%20sector%20pensions.pdf

Credit Action (2010): Debt Facts and Figures(Credit Action, April 2010)

http://www.creditaction.org.uk/assets/PDF/statistics/2010/april-2010.pdf

DWP (2009): Building a society for all ages(Department for Work and Pensions, July 2009)

http://www.hmg.gov.uk/media/33830/fullreport.pdf

DWP (2010): Workplace pension reform regulations - impact assessment(Department for Work and Pensions,

January 2010) http://www.dwp.gov.uk/docs/wpr-ia.pdf

HMT (2010): Budget 2010 in graphics(HM Treasury, March 2010)

http://www.hm-treasury.gov.uk/budget2010_graphics.htm

IFSL (2010): Pension Markets 2010(IFSL Research, February 2010)

www.ifsl.org.uk/upload/Pension_Markets_2010.pdf

NESTA (2009): Innovation that matters: how innovation is currently supported in an ageing society(National

Endowment for Science, Technology and the Arts, April 2009)

http://www.nesta.org.uk/library/documents/innovation-that-matters.pdf

OPM (2009): Uncharted territory: spending assets in retirement (Office for Public Management, September

2009) http://www.aegon.co.uk/industry/shaping-our-industry/research/uncharted-territory-spending-assets-in-retirement/

ONS (2009): National Population Projections 2009(Office for National Statistics, October 2009)

http://www.statistics.gov.uk/pdfdir/pproj1009.pdf

ONS (2010): Pension Trends - Chapter 14: Pensions and the National Accounts (Office for National Statistics,

January 2010) http://www.statistics.gov.uk/downloads/theme_compendia/pensiontrends/PTChapter14final.pdf

References

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Page 1

PPI (2008): Incentives to save in a pension: a review of the PPI's research (Pensions Policy Institute, March 2008)

http://www.pensionspolicyinstitute.org.uk/uploadeddocuments/Briefing%20Notes/PPI_Briefing_Note_44.pdf

SMF (2010): Early access to pensions saving (Social Market Foundation, March 2010)

http://www.smf.co.uk/assets/files/SMF_early_access_to_pension_saving_web.pdf

Towers Watson (2010a): Public Sector Pension Liabilities now 1.2 trillion (Towers Watson, press release, March

2010) http://www.towerswatson.com/united-kingdom/press/1418

Towers Watson (2010b): 2010 Global Pension Asset Study(Towers Watson, January 2010)

http://www.towerswatson.com/assets/pdf/966/GPAS2010.pdf

Turner et al. (2006): Implementing an integrated package of pension reforms: the Final Report of the Pensions

Commission (Pensions Commission, April 2006)

http://www.webarchive.org.uk/wayback/archive/20070801230000/http://www.pensionscommission.org.uk/

publications/2006/final-report/final_report.pdf

Watson Wyatt (2009): 'At-Retirement market' set for rapid growth in the next five years (Watson Wyatt, press

release, July 2009) http://www.watsonwyatt.com/europe/news/pressreleases/press.asp?ID=21729

Willetts (2010): The Pinch: how the baby boomers took their children's future - and why they should give it back

(Willetts D., Atlantic Books, February 2010)

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the pensions crunch: proposals for change

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