The promise of choice always sounds great. When the Chancellor announced plans to consider broadening workplace pension choice in his Autumn Statement, many immediate responses were predictably positive.
In pensions, choice might not always lead to better outcomes. In March 2014, a previous Chancellor introduced “freedom and choice in pensions”, and the industry is now still working on better supporting and protecting retirement outcomes for DC pension members. Choice isn’t bad and it’s important that members engage in the financial planning – but a focus must be maintained on protecting and improving outcomes. The question the industry will now debate is whether choosing a pot for life will help to achieve this.
Giving consumers the choice of where to pay their workplace pension contributions would undoubtedly be a significant departure from automatic enrolment, where success has been built on the exact opposite of choice and active decision making: inertia.
The Government’s call for evidence seeks view on a ‘lifetime provider’ model, where the first scheme an individual is enrolled into, or the provider they choose, becomes their ‘lifetime provider’. This would dis-intermediate the employer from their current role in supporting the financial wellbeing of their employees through the workplace. Many employers play a central role in communicating the value of pensions, a benefit which is core to employee benefit packages. Using the workplace to collectively engage employees in the merits of a common pension offering is extremely powerful. We also need to ensure that the protection that is afforded to workplace pension members by the governance and oversight applied by trustees, providers and the regulators isn’t foregone.
In the call for evidence the Governments suggests that a lifetime provider model would help resolve the issue of multiple (usually small) pots and support aims to encourage investment in productive finance assets. As with other live policy initiatives, this is predicated on driving consolidation and therefore scale in the pensions market. It is important that the debate on pots for life acknowledges the likely impact of other in-flight policy such as pensions dashboards, value for money framework and small pot consolidation. We will also encourage the Government to be thoughtful about changes which could jeopardise the success of automatic enrolment.
With increasing dependence on DC pensions at retirement the adequacy of contribution levels remains a more fundamental issue. Also the ongoing issues surrounding the availability of guidance and advice, so that individuals can be best supported in the difficult choices they are already required to make. We need to keep focus on the issues that will drive better outcomes for the majority of members who may not want to exercise choice.
There are big questions within the call for evidence and the 9 weeks available to reply are passing quickly. Pleasingly though the Government notes this is the beginning of a discussion about the long-term future of the market and we are pleased that this call for evidence will prompt a full and robust discussion of the issues. We all need to make sure that pension scheme members’ outcomes stay at the forefront of thinking.