Industry experts have expressed concerns about the readiness and potential drawbacks of the proposed “provider for life” model with some arguing that it could have significant implications.
NOW: Pensions CEO Patrick Luthi says: “A provider-for-life model is a significant departure from current pension policy and has substantial implications that the government must consider.
“Removing the employer from the current relationship with their employees and pension provider breaks apart the engagement opportunities that we see savers benefit from, when their provider and employer work together to communicate about pensions. It also diminishes the employer-led demand side influence on schemes. Government must also be mindful that overhauling the workplace pension concept, moving to a retail-type space, will introduce significant marketing costs and implications, pulling in a different direction to the drive for value for money .
“This all has repercussions for the efficiencies that are achieved under workplace pensions arrangements – and risks being less beneficial for lower earners than the current system. It could also leave lower paid people – with smaller pots and lower contributions behind. This would open up the problems that employer led auto-enrolment was designed to solve. The pension system needs to work for all savers, the lower paid and those with small pots must not be disadvantaged by system changes.
“More pressing issues, such as enacting the AE 2017 Review and addressing the essential question of adequacy and additional contributions, would make more of a difference to outcomes for members than system changes. A future vision must tackle this head on.
“We welcome the call for evidence as an opportunity to feed in and explore this concept ahead of government decisions – and look forward to working with the new Minister for Pensions and his team in building a vision and solution that works for all savers, now and long into the future.”
Aon associate partner Steven Leigh says: “While the overall aim to reduce the proliferation of small pension pots and improve value for members is to be welcomed – and we recognise that this is positioned as a long-term vision – many of the required building blocks set out in the call for evidence are not yet in place. These include pension dashboards, standard value for money metrics and approved default consolidators for small pots. There are also some concerns on the overall lifetime provider concept of moving decision-making on which pension scheme to use, away from the employer and on to the individual.
“Historically asking individuals to make choices on pensions has led to no decisions or poor decisions. The risk to the individual of remaining in a poor performing fund over their entire lifetime is huge. Based on the latest figures for the best and worst performing master trust default funds, this could equate to a difference of over £300,000 over the working life of an individual sitting in the worst performing fund.
“Bear in mind that a key factor in the success of auto-enrolment increasing participation in workplace pensions, is that employees do not need to make any decisions.
“There is also the potential for significant additional complexity for employers in running a workplace pension with the lifetime provider model. The employer would potentially have to judge whether its own scheme would be better or worse than a scheme nominated by an individual, as well having to be able to interact with multiple pension providers. Additionally, there are some concerns about the risk of levelling down with employers ceasing to offer their own well-designed DC pension schemes – which may, for example, currently offer employees subsidised administration costs and additional support – in favour of a default model.”
Isio director Will Aitken says: “We’re pleased that the problem of small pension pots is being addressed. However, today’s additional ‘pot for life’ proposals has the potential to revolutionise pensions as we know them.
“An employee who chooses their own pension provider is, by definition, far more engaged in the pensions process than someone who’s along for the ride. But that change wouldn’t be without some pain as well. For employers, this potentially doubles a payroll’s workload and introduces many more opportunities for errors to creep into payments. If this change proved popular with employees, it would need to be accompanied by a rethink in how contributions are calculated, managed and monitored, one that might require regular oversight and assurance from third parties.
“We also believe this would change the dynamic between employee and employer. To date, pension provision has been seen as something that ‘belongs’ to employers to some extent. This reform would change that dynamic and weaken that link, finally making it clear that in DC pensions, employees need to take ownership.
“Finally, it will be fascinating to see how pension providers compete if they can go direct to consumers. Would they be trying to sell on the basis of past investment performance? Charges – cheap as chips or reassuringly expensive? User experience and employee peace of mind? How they choose to invest your money? A one-stop shop for all your finances?
“Pots for life is a far more radical change than simply moving forward the existing plans to deal with small DC pension pots.”
iSIPP managing director Hrishi Kulkarni says: “A pension pot for life could be a major leap forward potentially enabling retirement savers to take better control of their own pensions giving the freedom to choose their own scheme for automatic enrolment.
“Too many workers have built up multiple pensions throughout their careers creating a real danger that past savings become an administrative headache, forgotten or even worse, lost. Industry estimates suggest there are around £27bn of lost pensions in the retirement savings system.
“We support any policy initiative that that empowers retirement savers by making their pension pots easier to manage when combined with lower associated costs and increased transparency.
“But those people who are self-employed mustn’t be overlooked if the pot for life initiative is to be a success. Less than 20 per cent of 4.5m self-employed UK workers save into a pension and this vital group must also be incentivised to build up capital for a fulfilling life after work.”
Acca head of technical and strategic engagement Glenn Collins says: “Acca welcomes the interesting proposal requiring employers paying into an existing pension pot if they choose, however it should be executed in a way that minimises administrative burdens and complexity for business.
“Whilst the short window required for implementation will be welcomed by those in receipt of a pension, payroll providers are now under an extraordinary pressure to be able to plan and deliver changes to NI, payroll and pensions in record time. Further clarity around the expectation of delivery is required, and we will work with Acca members to ensure implementation runs as smoothly as possible.
“It will be interesting to see what the impact on the reduction of Class 4 National Insurance will have on whether incorporation remains the most tax effective route for most small businesses. Acca has always maintained that incorporation should be for sound business decisions rather than a tax-led one.
“The reductions in NICs obligations for the self employed help reduce the long established distortion between incorporated and unincorporated business formats for the smallest businesses.”
