Axa says the current system for opting out of the state second pension and joining a private scheme is in danger of making savers poorer in retirement.

If people remain out of the state second pension, their incomes in retirement will be at least 13% lower than if they stuck with the state.

Millions of people have opted out of the state second pension - known as “contracting out” - because they have joined private pension schemes.

State benefit

When they opt out, a large part of their national insurance - which would have gone towards a state second pension - is switched to their private scheme in the form of a rebate.

For many years some financial advisers have routinely advised clients to contract out in a bid for a better pension. Read the contracting out Q & A

The rebate has to be big enough so that, when it is invested on the stock market, it will produce a substantial fund at retirement - big enough to generate a better pension than the state would provide.

But Axa says the rebates have been set far too low.

So people who were advised they would be better off opting out will now be much better off returning to the state - or “contracting back in”.

Mass

But if millions do what would make financial sense - and return to the state - it will be a damaging blow to the ’s entire strategy for pensions.

Ministers want more people to provide for in retirement.

Steve Folkard, of Axa, said: “Axa is urging the government to make changes for the current tax year and beyond or there will be a mass migration back into the state scheme.

“If we are not likely to match state benefits because the rebate is too low then, as a responsible pension provider, we believe it is right to highlight this.”

Unless rebates are raised, Axa says its own financial advisers will be telling customers to go back to the state scheme (or contract back in) because otherwise they will lose out.

Living longer

On current rebates, someone on a salary of 15,000 a year could expect them to produce a pension of just 169 a year at retirement - 30 less than they would get with the state second pension.

The government sets the rebates every five years and the last revision was in 2001.

But Axa says they no longer take account of increased life expectancy - which has continued to rise in the last two years.

Because people live longer, their pensions have to be paid for longer, spreading a pot of pension money more thinly over a greater number of years.

To produce the same annual benefits, a much greater fund at retirement is needed. But this factor has not been taken into account in the rebates.

The government spends billions of pounds every years on the rebates.

According to some estimates, it would need to spend 1bn a year extra to raise the rebates to an appropriate level.