Member choice under a pot for life system should include the ability to have contributions paid into self-invested personal pensions (Sipps) and personal pensions, according to a Social Market Foundation (SMF) paper published today.
A policy paper by the SMF authorised by Michael Johnson and The Lang Cat public affairs director Tom McPhail says the freedom to choose pot destination should be wider than just master trusts and group personal pensions (GPPs) where an arrangement meets auto-enrolment rules around contributions and availability of a default option.
The paper calls for firms offering destination pots to be required to comply with the FCA’s consumer duty, a standard that trust-based arrangements are not currently required to meet.
The paper suggests that P45s should include details of an employee’s most recent active workplace savings pot, to encourage those moving jobs to ask their new employer to pay contributions to the last active pot.
The paper proposes a two-stage implementation process. Firstly, individuals could be given the right to choose where their contributions are paid by their current employer. In phase two, an individual’s chosen provider could become their default arrangement.
Pensions minister Paul Maynard MP’s foreword to the paper estimates the cost to the industry of administering small pots at £225m per year. He says that the multiple default consolidator model announced last month will go some way to addressing the issue, but adds that this will not stop the flow of new pots being created.
The SMF paper suggests that the DWP’s proposal of a carousel approach for the consolidation of sub-£1,000 pots would require both a database and a clearing house to ensure these small pots are transferred to the correct owner.
It also raises the question of whether pot assets should be transferred in specie or sold and reinvested.
With five master trusts holding 75 per cent of sub-£10,000 pots, the SMF suggests that these providers would likely become authorised consolidators, raising questions as to which of the remaining 16 commercial DC master trusts would apply for and receive authorisation from The Pensions Regulator (TPR).
Johnson says: “The introduction of member choice, focused on arresting the ongoing flow of new small pots, would complement the DWP’s proposal for consolidators to help reduce the existing stock of small deferred pots. Both initiatives should be viewed as enhancements to, and natural evolutions of, the auto-enrolment regime.”
Member choice would also represent a significant stepping stone towards a single (pensions) pot for life, facilitated by common sense and digital capability. Simplicity to the fore.”
Minister for Pensions Paul Maynard, says: “The Social Market Foundation’s report provides an interesting perspective on the benefits of member choice and a single pot for life approach. I would encourage all of industry to engage in this discussion and respond to the DWP’s Call for Evidence on the matter – to help inform the development of a longer-term pensions policy. My objective will be to ensure that the interest of savers and their outcomes in retirement remains at the heart of our decisions.”
Lawrence Churchill CBE says: “This policy paper sets out a solution which begins with the end in mind – empowerment of the individual to direct their own contributions to the provider of their choice (as has already happened in Australia) and sets out how it can be overlaid onto an occupational pension system.”
I commend Michael and Tom for thinking through the various issues to be addressed and I hope that the brightest and best in the industry will take up the challenge and respond to the Government’s Call for Evidence to help develop this policy into a future reality.”