Plans for a lifetime pension, also known as ‘pot for life’ have been unveiled by the Chancellor in his Autumn statement today.
Under the plan employees will have the right to pay into the pension pot of their choice. The policy is designed to stem the proliferation of small pots.
The announcement has divided views across the pensions industry with supporters arguing it will promote engagement and reduce the small pot challenge, while critics say it will be fraught with administrative and regulatory complexity, could lead to higher opt-outs and will not stop unengaged individuals increasing the number of pots they have.
Fears that high marketing spend will be used to attract customers to more expensive providers have also been professed.
The Chancellor says: “The government will tackle the long-standing problem of small pot pensions with a call for evidence on a lifetime provider model which would allow individuals to have contributions paid into their existing pension scheme when they change employer, providing greater agency and control over their pension.”
Jon Greer, head of retirement policy at Quilter: “Changes in working habits mean people who might have had just one or two jobs during their lifetime now tend to move far more frequently and thanks to auto-enrolment are building up multiple pensions, often with little in them.
“The issue surrounding small pots was raised in a DWP consultation earlier this year while Laura Trott was still Pensions Minister, with the idea of a pot for life mentioned as “a more fundamental change that may emerge … but was clearly some way off”. However, Trott appears to have made her mark on the Treasury only a week into her new role, as it is with some coincidence that a ‘pot for life’ proposal, and likely a call for evidence, has now landed in the Chancellor’s Autumn Statement. The idea marries nicely with the Chancellor’s aim of funnelling more money into the UK economy through a concentration of workplace pensions who are able to do so.
“Currently, eligible new employees must be automatically enrolled into a pension scheme of their employer’s choosing. Today’s ‘pot for life’ proposal will change this by ensuring the pension pot can move with the employee from job to job, which would help resolve the small pots issue caused by the current system.
“Though this proposal sounds positive on the surface and will be useful for those members who are keen to take ownership, it has flaws. The ‘pot for life’ would likely take a long time to gain traction, not least because the majority of workplace pension savers are largely disengaged. They simply trust that their employer gets on with setting up their pension through the auto enrolment process and they therefore may not be keen to engage with a system that requires them to play a more active role.”
Gail Izat, managing director for workplace, Standard Life says: “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. A pot for life might be appealing from a simplicity perspective as the pension 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.”
Speaking at the Corporate Adviser Master Trust & GPP Conference today, Capital Cranfield professional trustee Andrew Cheseldine said the proposal was mired with complexity.
He said: “Is it for all schemes – what happens if you have people who want relief at source in a net pay scheme, and vice versa? Employers will move from dealing with one provider to up to 12. I think the burden on the regulator would increase ten-fold. How are they going to check contributions are correct on multiple schemes? And what will this approach do to opt-out rates?”
Steve Charlton, managing director of DC, EMEA and Asia, SEI, says: “The decision to consult on offering UK workers a pension pot for life will not only fail to solve the existing problems in our pensions system, but further exacerbate them.
“Firstly, whilst the devil will be in the detail – and little detail has been shared so far – from what we understand, this proposal would require building expensive infrastructure that doesn’t yet exist, such as a clearing system that appears to have no sponsor. Said infrastructure would be phased in, which would actually create more, not less, small pots from day one.
“Secondly, we already know that when it comes to their pension, individuals don’t have a great sense of ownership – in a study conducted by SEI just last year, nearly three-quarters of workplace pension savers reported low or no ownership.1 It is therefore unlikely that individuals will engage and select a provider, even if given the opportunity.
“Those who do will likely have significant pots, and access to a financial adviser. Most will choose a name they are familiar with, which may mean innovators or new entrants are blocked from entering the market. In turn, big insurers and banks may be less incentivised to innovate, leaving members with poor options and, worse, poor outcomes.
“Whilst we applaud any initiative that seeks to provide better outcomes for members, we believe a pot for life approach falls short. As well as being a burden to employers, who are naturally not adept at running a pension scheme, such an initiative fails to address one of our industry’s greatest challenges – namely, that not enough money is being paid into enough pots over time to give the majority of savers a meaningful income in retirement. There is no quick fix to this problem. Perhaps the money that could have been spent on new infrastructure could instead be used to create a long-term savings policy that will be here for years to come.”
Kate Smith, head of pensions, Aegon says: “Currently, under the highly successful automatic enrolment regime, it is the employer who selects the pension scheme provider for their employees, often with the help of an adviser.
“We recognise that the ‘pot for life’ may appeal to those employees who take a hands-on approach to their workplace pension and wish to select their own pension provider, including use an existing provider, possibly with the help of an adviser.
“However, there are risks of poorer retirement saver outcomes for millions of employees if employers feel they’re no longer at the centre of the pension provision for their employees.
“Pension schemes can be used to as a means to attract and retain employees, as well as helping them to achieve greater financial security for life after work, helping them to retire. Many employers go beyond the statutory auto-enrolment 8 per cent minimum by paying higher pension contributions, and by providing employee support to increase their engagement with pensions.
“The ‘pot for life’ concept may damage this relationship, and could lead to lower employer contributions and support in the workplace. It could also mean fundamental changes to how workplace pensions work today, so the concept needs careful consideration alongside other pension policy priorities – such as the value for money agenda.”
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