With the consultation on introducing a lifetime provider model, or ‘Pot for Life’, closing tomorrow, UK pensions industry experts have raised number of concerns associated with the new approach.
The model, announced by chancellor of the exchequer Jeremy Hunt in his Autumn Statement, aims to simplify the pensions market by allowing individuals to move towards having one pension pot for life.
Richard Birkin, partner at Isio, said the government looking to innovate the pensions market is “encouraging”.
However, while a ‘Pot for Life’ has many attractions and could help address some of the challenges facing the industry, there is a raft of government initiatives already in progress which should be given time to bed in before further reforms are contemplated.
He said: “From the small pension pots solution to Pensions Dashboards and from innovation in the decumulation phase to ensuring pension scheme managers are testing that their schemes give value for money – there is plenty of focus on improving member experience and outcomes.
“We’d rather that the government sees the current set of policies to fruition first before thinking about introducing the next set of reforms.”
Laura Myers, partner at LCP and head of DC, agreed the proposal represents a “major distraction” from much more urgent initiatives such as taking forward the recent legislation on increasing automatic enrolment pension contribution.
Myers added that the model, coming on top of the creation of an ‘ecosystem’ for pension dashboard and ‘clearing house’ for micro pot consolidation would create substantial additional costs which would end up being borne by members, as would the additional marketing costs associated with a choice-based model.
She stressed that there are better ways of tackling the proliferation of small pension pots, which do not involve “such fundamental disruption to the existing system and do not risk undermining existing high quality provision for low and middle earners”.
Myers added that a form of ‘pot follows member’ would help to prevent the creation of new small pots without undermining existing high quality provisions.
“The top priority for tackling the under-saving crisis is getting more money going into workplace pensions. Yet implementation of legislation that would do just that is currently stalled while the government apparently has capacity to do work on a complete restructuring of the whole architecture of automatic enrolment,” she noted.
She added that there is already a “huge amount” of change and reform in the pipeline, “taking up the time and money of employers, providers and trustees”.
“These various reforms need to see the light of day and then be given time to bed in and their impact to be assessed before moving on to further change of questionable benefit and considerable cost to members,” Myers said.
Tessa Page, Association of Consulting Actuaries (ACA) and DC committee chair, added there is a risk that ‘Pot for Life’ prompts employers to view workplace pensions as less important, while also bringing a new set of risks around mis-selling and scams.
She said: “We recognise a need to test the status quo of the workplace pensions framework but given the sheer number of initiatives in flight it feels that policy priorities should lie elsewhere.”
ACA chair Steven Taylor added that many savers find pensions complex and difficult to engage with.
In fact, the Pensions and Lifetime Savings Association (PLSA) found that two-thirds of employees do not want to choose their workplace pension provider, with 55% of employed workplace pension savers expressing minimal confidence in making their own decisions.
He said: “To move to an approach whereby individuals are making judgements about the merits of different pension products is a significant ask and will demand new safeguards and controls to avoid worsening member outcomes at retirement.”
Philip Smith, DC director at TPT Retirement Solutions, agreed that creating a lifetime provider system would be a huge operational challenge for schemes and employers.
“It would require a significant overhaul of the current pension system to create a clearing house to handle the increased administrative burden. The government may also need to make it easier for savers to assess the value for money of their pension,” he continued.
However, despite the challenges, Smith said that ultimately the lifetime provider reforms should provide better outcomes for members.
He said: “The lifetime provider reforms could be a game-changer in improving retirement outcomes for DC pension savers. The changes could provide members with a better opportunity to understand the benefits accumulated through their DC pension pot and thereby give them greater control.”
He added that the members would find it easier to engage with their pensions, make investment decisions, and monitor how much they have saved for retirement.
“In turn, this could encourage people to increase their pension contributions, so they are better prepared for retirement,” Smith concluded.
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