Catherine Howarth explains why we need to allow savers to have choice when it comes to picking their workplace pension provider
The ability to make decisions based on personal preferences is one we take for granted in a capitalist democracy. From what to eat for lunch and where to go on holiday, to which house to buy and which bank to trust with our money, we are used to being able to exercise control over decisions that affect our lives, based on what we can afford and judge to be best for our individual circumstances. But there is one significant area in which we have no such choice.
Savers in defined contribution (DC) workplace pension schemes have no choice over which provider looks after their pension. Despite the fact that their own money as well as their employer's goes into their scheme, and they bear all the investment risk, it is the employer rather than the saver that has the right to choose the scheme. True, savers may be offered choice on the platform selected by their employer, but savers who wish to change to a provider with lower charges, stronger governance, or an ethical fund that suits their tastes have no right to do so without losing their employer's contributions.
It's important to emphasise that workplace pension saving is a practical and attractive way for people to save: it is tax-efficient and has the enormous benefit of contributions made by employers. Furthermore, auto-enrolment (AE) has so far been highly successful in getting people connected into the system, with opt-out rates much lower than many nay-sayers predicted.
Nor should anyone deny the power of inertia among savers in workplace schemes. The high proportion of savers in default funds is a strong indication that most people don't want to make an active choice. Nevertheless, even a small annual flow of individual savers between schemes would send a valuable signal to the boards of pension schemes and their regulators. The lack of real competition and market discipline in the workplace pensions sector does not instil confidence. After all, this is a market that the Office of Fair Trading condemned in 2013 as "one of the weakest that the OFT has analysed in recent years". Allowing savers to choose their own provider would encourage a more saver-centric mentality in the sector.
The next question is whether there are meaningful choices to be made in this market. Last year, ShareAction surveyed the nine largest AE providers, ranking them on governance arrangements, stewardship, transparency, communication and responsible investment. We found a wide gulf in performance between the best and the worst providers.
When you add in the considerable variation in costs and charges paid by savers, it is clear that the choice made by employers could be very material to savers' long-term outcomes. Employers will have their own criteria when selecting a scheme but these may not always align with the best long-term interests of employees. In that respect, the loss of member representation on pension scheme boards in the AE era is worrying. ShareAction is encouraged that a number of major providers are considering appointing suitably qualified members to sit on their boards and IGCs.
There is good evidence from overseas of the merits of saver-led choice. Since 2005 Australian employees have been free to choose the scheme into which their employer's contributions are paid. Employees can choose to access a scheme with lower fees, stronger governance, better service, different investment options, or an approach to fund stewardship they support.
Fears about the logistics of enabling choice can be exaggerated. Employees are free to choose their own bank account to add onto payroll systems without issue. With the right technology and clearing arrangements, the same could apply to pensions. Indeed, there are employers of all sizes who already give staff the choice to put their employer contributions into their AE-compliant scheme of choice. Making that a widespread right seems a logical reform step for the government's AE review in 2017.
If we are serious in the UK about developing a world class pension system, we need to empower savers while recognising the critical need for robust minimum standards for default funds. Choice and competition are essential to driving up standards in any industry, particularly one with a poor historic record of putting customers' needs first. Our new prime minister wants an "economy that works for everyone". Giving savers the gift of choice when it comes to their workplace pension provider would be a positive step in that direction.
Catherine Howarth is chief executive at ShareAction
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