The Government wants a lifetime provider model to address multiple pensions pots.
When I’m out and about meeting consultants and advisers, the discussion inevitably moves onto the subject of pot for life – or the lifetime provider model as it’s more often known.
The Chancellor’s Spring Budget revealed the government is still considering a model where employees would, by default, use the same pension scheme as they move from job to job.
The government wants better outcomes for savers and to stop the proliferation of pension pots which too many people lose track of. Estimates suggest there are around 3m lost pensions pots worth £26bn which is hardly surprising given that people have an average of 11 jobs during their lifetime.
Increased job mobility can result in a pension pot for every job, a changed relationship between employers and employee pensions – and additional industry costs. The DWP already has the problem of inefficient and costly small pots under £1,000 in its sights and the solution it has proposed to address this could be a stepping stone towards the lifetime provider model.
Lifetime provider model: call for evidence
While many media headlines at the time of the Spring Budget suggested it’s full steam ahead on the lifetime provider model, the Department for Work and Pensions (DWP) is clear that it’s still at the call for evidence stage, and no decision has been made.
As FT Adviser commented, it’s stuck at amber and will get a “definite …green and red light” at some point.
While providers, advisers and employers rightly want to be able to plan so that they’re prepared for any eventuality, whatever happens is still years away.
Employee choice first?
Yet while the DWP is exploring options, it seems to hint employee choice could be introduced first by changing automatic enrolment (AE) rules to require employers to accept an employee’s choice of scheme, with the default lifetime provider model introduced later on.
If it went ahead, it would be a major change to the UK workplace pensions market where employers choose a scheme for their workforce. It’s rare for employers to facilitate payments to an alternative scheme chosen by the employee, who also has to find and consolidate any pots left behind after previous jobs.
As we know, the lifetime provider approach is already used in countries such as Australia, whose pension system is usually held up as a model of excellence.
Australia has experienced significant pension scheme consolidation, with a small number of supersized schemes emerging. Increased consolidation and moving towards fewer, larger schemes is a goal for the UK Government too.
The call for evidence around the lifetime provider model has certainly been polarising in the UK.
It would be a huge undertaking, requiring a lot of the government and industry’s capacity for change, with significant costs, including for employers who would have to be able to direct payments to multiple schemes instead of just one.
This could undermine other priorities, such as increasing savings to get more of the UK population on track for adequate retirement incomes when too many are falling far short.
Greater scale and more stable memberships of pension schemes make it easier for schemes to invest in less liquid assets, such as infrastructure or private equity – a cornerstone of the Government’s 2023 Mansion House compact. Diversification and the search for better returns underpin this.
There is also the worry that, without appropriate protections, more money will be spent by pension schemes on advertising and that this cost would be passed on to savers.
Supersized Australian experience
There are parallels with Australia here, where some schemes appear to have bigger marketing budgets, and their fees tend to be higher than in the UK. The new value for money framework would need to be implemented effectively to mitigate this risk.
Some have also suggested fees might increase if employees no longer have the benefit of collective bargaining via their employer as well as a reduction in cross-subsidies from those with big pots to those with small pots. As it stands now, workplace schemes tend to have a single charge for their employees, whereas retail pensions often use tiered charges, with reduced fees for larger pots.
We await the Government’s views on these different arguments, but if there is to be a change, it will be quite a few years away.
For the concept to work, we would first need a much more consolidated market of fewer, larger pension schemes.
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