Jeremy Hunt is expected to make radical changes to workplace pensions in the UK, by allowing employees to nominate which scheme their employer pays into.
The Financial Times has reported that these changes will be included the Chancellor’s Autumn Statement tomorrow.
These “pot for life” reforms look set to be the biggest shake up of pensions since George Osborne introduced pension freedoms in 2015 – and will be seen as further evidence of the government modelling UK auto-enrolment on the Australian pension system.
These reforms are expected to help reduce the number of small pots, encourage providers to boost performance and engagement, while driving further consolidation in the DC sector.
The FT quoted an unnamed source from HM Treasury saying: “Helping people keep the same pension pot will stop billions of ponds being needlessly lost and make sure tomorrow’s pensioners benefit from every penny they save.”
Currently employers select the pension scheme that is used for auto-enrolment, which means when people move jobs they often end up starting a new pension plan with a different provider.
These are not automatically consolidated and thanks to repeated delays in attempts to launch a pensions dashboard, there is no central place where individuals can view all their pension holdings.
This proposed change follows a government call for evidence on how to address the issue of small deferred pension pots earlier this year. At the time the then pensions minister Laura Trott – who has subsequently moved to the Treasury said: “The growth of small pots means there is undue cost and inefficiency in the pension system.
“It creates a risk that deferred members lose track of their workplace pension savings – acting as a disincentive to member engagement. And it creates a cross subsidy risk for members with larger pots, which may impact their retirement outcomes.”
There has been speculation that the government may introduce “pot follows member” rules, where these pensions are consolidated into the new workplace pension scheme following a job move.
Hunt’s plans though — expected to be announced via a further ‘call for evidence’ — would go one step further, giving employees the right to nominate their own pension scheme, rather that the one selected by the employer.
Industry sources with knowledge of the Australian pension system say this has encouraged a greater focus on performance of default schemes, with many of those schemes investing in more expensive private assets to deliver superior overall returns. It has long been a complaint of the UK system that there is a focus on cost at the outset, which has acted as a barrier to investments in less liquid assets, and poorer member outcomes as a result.
The government has made it clear that it wants to unlock the billions invested DC schemes and encourage wider investment in private assets, including UK-based tech and fintech start-ups and green infrastructure projects as a way of helping boost growth in the domestic economy.
Not all in the industry are supportive of this measure. Steve Webb, former pensions minister and now partner with LCP, the actuarial consultants told the FT this was a “terrible idea”. He says: “It could lead to a fragmentation of the pension system. Lower earners risk being left worse off if they can no longer access a good value workplace pension.”
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