In his Autumn Statement speech yesterday, the UK’s chancellor of the exchequer, Jeremy Hunt, announced a consultation on a lifetime provider model to simplify the pensions market by allowing individuals to move towards having one pension ‘pot for life’, and on potential expanded role for collective defined contribution (CDC) schemes in future.
As part of that, the government is looking to introduce the multiple default consolidator model to enable a small number of authorised schemes to act as a consolidator for eligible pension pots under £1,000.
No further details have been released yet, however, Hunt stated the consultation will take place this winter.
Gail Izat, managing director for workplace at Standard Life, said: “While we wait to see the detail of the consultation, the idea of a ‘pot for life’ would need careful thought given the practical considerations around implementation and the potential distraction from existing initiatives.”
Izat said that a ‘pot for life’ might be appealing from a simplicity perspective as the pension pot could follow people from job to job but there are “bigger priorities facing savers and the pension industry that we would tackle first”.
“These include ensuring contribution levels are adequate to provide people with a decent retirement income, identifying ways to extend advice and guidance to those struggling to make decisions and implementing the government’s value for money framework that will empower people to determine whether their pension offers good value,” she said.
Laura Myers, head of DC and financial wellbeing at LCP, expressed that the proposals risk undermining the current system that “delivers high quality and low-cost workplace pensions to millions of workers”.
“At present, employers act on behalf of their entire workforce, benefiting from competition from pension providers, and negotiating a good deal for high and low earners alike,” she said, adding that in a ‘pot for life’ system, the pensions industry will inevitably seek to ‘cherry pick’ high earners, while ordinary savers get left behind.
“Inertia will remain a powerful force, with many workers, who can’t afford expensive financial advice, simply staying where they are”
Laura Myers, head of DC and financial wellbeing at LCP
She continued: “Inertia will remain a powerful force, with many workers, who can’t afford expensive financial advice, simply staying where they are but their workplace scheme will now be less attractive to providers who may well increase charges to make up for the lost contributions of high earners.
“In addition, employers may reconsider if spending money on their pension scheme is a good investment if many of those who may benefit are no longer current employees. If this happens then a large number of pension savers will lose out,” Myers said.
She added that individuals having freedom on where to direct their pension contributions will also expose them to greater risk of making “sub-optimal” decisions.
“There will be a growth in the number of organisations offering to be the home of workers’ pensions via glossy marketing campaigns but not necessarily offering the best value for savers. There is also the ever-present risk of workers falling foul of illegal scams and this will need to be strictly regulated to avoid this being a field day for scammers,” she warned.
Myers added that if a change is needed to deal with the problem of small pension pots as workers change jobs, alternative ideas such as ‘pot follows member’ could help to avoid this problem, but without undermining the foundations of the current system of workplace pension provision.
Hannah English, head of DC corporate consulting at Hymans Robertson, agreed that while the proliferation of deferred small pots is an issue that should be tackled, the consultancy is “cautious” about the proposals to allow members to manage and determine where both their deferred and current DC pots are invested.
She said: “Introducing such changes would put an overwhelming amount of responsibility on members to ensure they make the best decision possible in the most informed way.”
English added that the current lack of understanding of savings vehicles amongst the average saver could result in savers making poor decisions about where their pot is invested, perhaps making decisions based on the cheapest solutions or those that are the most marketed, rather than those that offer the best value for money.
She said that education to savers would need to be carefully managed as part of this initiative. “Auto-enrolment was incredibly successful due to the inertia of members, and we don’t want to undo the good work done here,” she added.
Pensions Management Institute (PMI) president Robert Wakefield also expects the proposals to potentially significantly disrupt the current system.
“Employers will find themselves contributing to a range of separate schemes and providers will be forced to develop a communications network to ensure that changes of employer are managed quickly and efficiently,” he said.
“Another issue is that this scheme requires intervention on the part of individual members rather than operating through defaults. We would therefore expect this proposal to have such a low take-up rate that we would question its viability,” he continued.
Mark Futcher, partner and head of DC at Barnett Waddingham, said the proposed consultation is in fact for a ‘stapling’ model, with new employees asking their employer to pay into their existing pot.
“Stapling can be done in a number of ways, but essentially it risks members keeping their first pension pot for the rest of their life,” he said.
He argued that how that first pot is decided is up for debate, with no clarity on which schemes or master trusts are allowed, whether there will be increased regulatory requirements on value for members and whether employers will have a responsibility to mirror the existing transfer rules to mitigate the risk of harm to their staff.
Futcher said: “Even once established, we risk an administrative nightmare without a robust central clearing house.”
He added that it is also hard to see how this would help improve people’s pension pots at retirement. “Staying in the same pot means savers risk delays to investment decisions, poorer products, a lack of employer governance, and higher fees, as individual employees will always get a worse deal than large firms,” he noted.
“What’s more, if we see more individual retail policies and less consolidation, the Mansion House proposals to use pension funds to invest in the UK become even more difficult to implement,” Futcher said, adding that the consultation does not guarantee change – but even if the consultation results in a positive outcome, making this work “would easily take a decade”.
He said: “It has taken almost that long for the government to fail to deliver a pensions dashboard – I won’t be waiting with bated breath for this reform to come to pass.”
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