FTA In Depth: Abolishing contracting out - one pot or two?

The Department of Work and Pensions' (DWP) decision to simplify defined contribution schemes by abolishing contracting out has made the process far more costly and complicated, Steven Cameron, head of regulatory strategy at Aegon, claimed.

The DWP decided to abolish contracting out for defined contribution schemes as the benefits from these schemes can vary making it difficult to predict whether the additional state pension or contracting out would be a better option.

This will take affect from 6 April 2012.

Mr Cameron warned this has created an issue for providers as the law required that the two pots - national insurance rebates and pension - were kept in separate pots and the two cannot be combined due to different charging structures.

National insurance rebates are called protected rights and everything else is called non-protected rights.

From 6 April 2012, the two pots will not need to be kept separate "as they are lifting the restrictions about the sort of annuity you can buy with what was previously called protected rights", said Mr Cameron.

He admitted this gave more flexibility for consumers but warned that for providers, this was where it got complicated.

Mr Cameron said: "The issue with protected rights is that the contributions differed as it was dependent on someone's earnings and the rates of rebate that were given. Therefore you never knew how much it was going to be as it changed from year to year.

"Because of that, the charges that we levied were different to the charges that we deducted from the other part - one was a regular contribution that you could predict in advance and you knew how much it would be year on year but we had different changing structures for the protected rights and the non-protected rights."

Jamie Wright, product strategy director for savings at Legal & General, agreed that there were different charging structures for the two but he emphasised this was "not a problem" and that providers "were working with the Association of British Insurers (ABI)" to find a solution.

Aegon has considered if it can all be pooled together to show customers a single figure in the future.

Mr Cameron said: "But we've concluded that we can't as there are still different charges and still different things that are happening, so we will continue to show them separate on the yearly statements."

Mr Wright agreed providers were still working on how to pool the funds.

He said: "It is an operational issue - providers will either choose to run two pots or will put them into one pot."

Robert Graves, head of pensions technical services at Rowanmoor Pensions, did not think two different pots were needed.

He said: "If the two are on different charging structures, providers have two choices. By default, maintain two separate arrangements or make the choice and say we are no longer getting rebate payments into protected rights pots and find a way to transfer that into one charging structure. But I agree this would depend on the whole system."