The Department for Work & Pensions (DWP) consultation on its ‘pot for life’ proposals closed in January, eliciting strong industry debate from those in favour and those against.
Beyond the theorising, however, there are significant questions that employers will need to answer should the reforms come to fruition.
With auto-enrolment in its twelfth year of existence, the current regime still has some way to go to ensure it delivers adequate retirement savings for all. While inertia has successfully created a generation of pension savers, with millions more people now paying into their retirement pots, contribution rates remain too low and there are still millions falling through the savings net.
There are still challenges to solve like how savers can maximise investment returns, how consolidation can drive better outcomes, how can savers be encouraged and find the means to increase their contributions and how do savers get support in making the right retirement income decisions?
The DWP’s proposals aim to encourage greater pension ‘ownership’ so that savers have more control of their savings and are more likely to trust in and take more proactive control of their pots. The result, it is hoped, will drive better outcomes for savers and eliminate problems like the proliferation of small pots, caused by employees starting a new pension every time they change jobs.
Yet, for employers, the proposals could have big ramifications. Given the immense work that went into creating the auto-enrolment eco-system, businesses would rightfully query the desirability of changing employee benefit programmes, systems and payroll to cater for another step-change in workplace pensions.
Putting in place the scheme would be operationally complex too as it could require a completely new or overhauled defined contribution infrastructure. Ultimately, it appears likely that at least some of these costs would have to be clawed back from savers in the shape of rising fees.
For example, the potential new regime could see employers paying different savings rates to multiple providers meaning there would need to be complex ‘plumbing’ set up to channel these varying payments, at the right time, for the right member to the right provider.
And the challenges aren’t confined to administrative complexity, the governance and authorisation regime would need to be significantly ramped up so that members can objectively and simply compare different schemes and providers, particularly to avoid the risk of ‘wild west’ providers endangering member security.
Meanwhile, there would need to still be a default option for apathetic savers and those that don’t want to choose their own provider: according to recent research by the PLSA, 69 per cent of savers would prefer for their employer to pick their workplace pension.
Experience shows that 90 per cent of DC savers are invested in the default investment fund, of which very few are by active choice, which raises questions around the fundamental desirability and productiveness of the proposal’s aim to improve choice.
The central risk could be a move away from business paternalism in the workplace and the relationship between employer and employee, in regards to pension saving, being fractured. Employers play a vital role in the financial lives of their employees with many businesses now trending towards implementing more engaged, generous and comprehensive initiatives.
But if the benefits of providing support, education and a robust pension structure are stripped back and the relationship reorientated towards to that between saver and provider, we may see employers step back in the support they offer employees.
Ultimately, the key decision facing the Government is whether to develop the changes that have already been made to the existing system, such as the pensions dashboard and expanding auto-enrolment, or to pursue more radical reforms such as ‘pot for life’.
One point is imperative: any change must be centred around increasing levels of savings as well as driving improved value for members through cost-effective, productive investment strategies.
