Insurer returns to state pension

Norwich Union says all customers should get advice on the issue

Insurer Norwich Union is planning to move about 40,000 of its customers back into the State Second Pension (S2P).

The move follows a low response to a mail-out by the insurer to its customers advising them to contract back into the scheme.

Norwich Union said it believed "changes in the economic environment" had eroded the potential financial benefits of contracting out.

The S2P is paid in addition to the basic state pension.

State or private?

The S2P replaced the State Earnings Related Pension (Serps) in 2002, with the new system aimed at lifting the benefits to people on low and medium incomes.

[We] believe that the... logical step is to automatically switch these customers back into the state second pension Mike Kirsch, Norwich Union

However, workers have the option of "contracting out" of S2P - as they could with Serps.

Workers with a stakeholder or private pension who contract out receive a rebate of National Insurance contributions which is paid into their pension fund.

The reasoning behind contracting out is that the extra money put into a private pension scheme could provide better benefits on retirement than the state scheme.

However, in recent years the poor performance of the stock market has affected pension funds, leading some experts to believe that staying with the state system is a better move.

'Inertia' concerns

Norwich Union said it had written to 253,000 of its customers who were contracted out, but said it was "disappointed" that only 20% responded.

"We are concerned about the high levels of customer inertia on issues such as this and believe that the next logical step is to automatically switch these customers back into the state second pension and take the responsible approach for our policyholders," said Mike Kirsch, operations director at Norwich Union.

The 40,000 people the firm plans to automatically switch back into S2P are those who Norwich Union advised directly, or people who have no financial adviser registered to their policy.

The company says it "strongly recommends" that its remaining customers should seek independent financial advice on the issue.