A lifetime savings model, where workers would choose an automatic enrolment pension provider for life, taking it with them from employer to employer, has been kicked into the long grass by a DWP working group today.
A report from the DWP’s Small Pots Working Group Report published today has recommended that development of a lifetime model wait until alternative models, including member-led consolidation and bulk consolidation be considered as a priority.
The lifetime model was supported by Hargreaves Lansdown, a member of the working group’s contract-based expert panel. It said: “This option would have a significant positive impact on member engagement. The pension member, rather than the provider or the employer is at the heart of the system. Members would have their pension for their retirement”.
But this view was opposed by Creative, a member of the master trust expert panel, which said: “The success of the AE policy is in no small part due to its ‘nudging and inertia’ aspects. These benefits would be lost and 20 years’ worth of successful policy development (i.e. the AE policy) would be given up”.
The CBI told the working group: “Prioritising consolidation and member exchange models to help savers avoid the risks of small pots is an ambition that employers support. They want the lifetime provider model off the table because it would be much more complicated and expensive, and welcome the working group recommending further analysis of other options.”
A payroll member of the working group said a lifetime provider model: “Would have a huge impact on payrolls and bureaux who would have to upload multiple files to multiple providers. There is no standard file upload process currently so every pension provider asks for slightly different formats”.
The report says the lifetime provider model also creates potential serious risks to current workplace pensions provision. It says: “The model would effectively break the connection with the employer, which could weaken their engagement with the workforce in terms of retirement provision. This could impact on employer-led retirement planning for their workforce.
“It could also mean employers could be discouraged from going ‘beyond the minimum’ as the ability to tailor the scheme to meet the needs of their particular workforce.”
It notes that the lifetime savings model would also not be feasible for single employer trust schemes and the employer would be required to replace their single employer scheme. The development of a new regulatory framework would also be required to ensure that lifetime providers could fulfil the role that providers nominated by an employer do today, such as ensuring contributions are paid regularly; monitoring automatic enrolment compliance; and following up late payments.
The report also argues that a lifetime provider model could also cause competition issues, with consequent risks of ‘selection’, if it resulted in increased competition for the most economically valuable members. Currently some providers accept all employers, some accept employers and apply a connection charge and some providers make business decisions about which employers and sectors to serve. If the model were to also result in selection and filtering of members as a result of providers making business choices about who to serve, it could present risks to the existing supply for scheme members. This could in turn present risks to scheme member choice and access to value for money workplace pension provision for some types of member; however other types may find they have increased choice. It is not certain if supply would remain viable for those scheme members who historically have been viewed as the hardest to help in terms of workplace pension saving, including: lower earners; women; and younger people. In addition, this could potentially necessitate additional safeguards to protect consumers from unsolicited marketing. The Working Group’s view was that this model would present real risks to the viability of the market to continue to meet the needs of the group for whom AE was designed, although it could have benefits for more engaged and better off members.
On the lifetime provider model, the report concludes: “The voluntary lifetime provider model is attractive as it potentially puts the member at the heart of the solution, but again as this is member-led it is not likely to achieve large scale consolidation. The automatic and carousel lifetime model does not support the principles underpinning the success of AE, it would require significant change to the current pensions market structure, it is unlikely to change member savings behaviours and it could impact negatively on the employer role. Therefore, it is recommended that other large scale solutions are explored in the first instance.”