UK – Rebates paid to those contracting out of the state second pension should double to £22bn (€31.8bn) from 2007, triggering an increase of contracting out options, according to consulting firm Aon.

Currently many choose not to contract out of the state second pension because the rebates are not adequate to replace the pension benefits they surrender, its research found. But this may change at next year’s rebate review that will set the rebates for the five-years from April 2007.

Paul McGlone, principal and actuary at Aon Consulting, said that since the previous review in 2001/02 more emphasis had been given to the guaranteeing of pension promises.

He argued that increasingly UK pension schemes reserve more for the guarantees that they provide and that forthcoming changes are expected to lead to schemes placing a higher value on individual benefits when members want to transfer their benefits elsewhere.

Applying the same logic to the amount of money that the government offers to individuals who contract out of the state scheme would lead to “large increases” in individual rebates and reverse the declining contracting-out trend, McGlone said.

“The total value of rebates in the UK is currently around £11bn,” McGlone added. “To increase the rebates to a level that reflects the value of the guarantee being given up would more than double this figure.”

More contracting out would help the government reduce state pension provision to 40% of overall provision, compared with the current 60% but would increase costs, Aon said.

McGlone said that the additional cost would result in future savings for the government as if more people took private pensions. “This will not only save the government the cost of the state second pension but will also reduce the amount of pension credit it has to pay,” he added.

However, McGlone told IPE that he remained sceptical about higher contracting out rebates: “I do not think this will happen. I think it is slightly hypocritical if the government applies certain funding rules to the private sector and does not apply these rules itself.”