Pot for life reforms mark a “sea-change” in workplace pension provision and need careful consideration before implementation, leading industry figures say.
In the Autumn Statement today (22 November) Jeremy Hunt said the government would consult on giving pension savers a "legal right to require a new employer to pay pension contributions into their existing pension".
The Autumn Statement document said the government would launch a call for evidence on a lifetime provider model and small pots consultation.
It said: "The government is launching a call for evidence on a lifetime provider model to simplify the pensions market by allowing individuals to move towards having one pension pot for life, and on a potential expanded role for collective defined contribution (CDC) schemes in future. The government will also 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."
Commenting on today's announcement, Pensions Management Institute president Robert Wakefield said: "Today's announcement of a ‘pot for life' marks a sea-change in workplace pension provision.
"Clearly, we need to know all the details, and we understand that the government plans to issue a call for Evidence, but we need to consider the potential for significant disruption. 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. 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."
Hymans Robertson head of defined contribution (DC) corporate consulting Hannah English also believed the proposals needed to be treated with caution.
She said: "While we agree that the proliferation of deferred small pots is an issue that should be tackled - we are cautious about the proposals to allow members to manage and determine where both their deferred and current DC pots are invested.
"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. 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 added: "Education to savers would need to be carefully managed as part of this initiative. Auto-enrolment (AE) was incredibly successful due to the inertia of members and we don't want to undo the good work done here."
Standard Life managing director for workplace Gail Izat agreed careful consideration was needed: "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."
Questions for employers
Aegon Head of Pensions Kate Smith said the pot for life proposals raised questions for employers.
She said: "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."
Smith explained: "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 AE 8% minimum by paying higher pension contributions, and by providing employee support to increase their engagement with pensions."
She added: "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."
Travers Smith pensions partner Andrew Lewis agreed: "One pot for life is an admirable aim for consumers and something that many will want to support. But it has huge potential strategic and operational implications for the whole pensions industry.
"Employers, pension providers, consultants and trustees will want to scrutinise the consultation really carefully and plan well ahead - there is a lot of road yet to be travelled on this issue."
A long way off
People's Partnership, provider of The People's Pension said the package would bring the workplace pensions market closer to the retail banking market with fewer, larger providers, offering similar products and with savers able to choose who to save with.
Director of policy Phil Brown said: "This could be an attractive evolution for the market but it's a long way off and the regulatory and practical challenges are huge.
"The government's thinking on the lifetime provider model is rightly at an exploratory stage and they acknowledge the potential difficulties. We think the proposal is worth a thorough exploration although it would take years to implement."