Between the Mansion House reforms of early summer and the recent Autumn Statement, a consultation about small pots became big box office. There were ministerial speeches and newspaper briefings extolling the benefits of pension ‘pots for life’, underpinned by a new ‘lifetime provider model’.
This does seem significantly at odds with the current structure of the workplace pension system and, along with it, the market in which corporate advisers operate. Some say these proposals could cause a seismic change in the industry.
In the recent Autumn Statement, the chancellor Jeremy Hunt said: “I will consult on giving savers a legal right to require a new employer to pay pension contributions into their existing pension pot if they choose, meaning people can move to having one pension pot for life.”
The move had been widely trailed across the media and framed as a significant reform, echoing similar moves in Australia some years ago. Arguably something that had been regarded as a crease to iron out in the auto-enrolment system – the prevalence of numerous small pots – was now presented as something needing a more substantial, consumer-centric reform. Who, after all, would object to a pension pot for life?
There are, however, many objectors. Critics include a number of established pension providers and there have been concerns raised from both consultants and trustees as well as the Pension and Lifetime Savings Association. There are supporters though, with consolidator PensionBee swiftly out of the PR blocks to cheer
the proposal.
A practical approach
Before we look at this debate it makes sense to look at the practicalities in terms of when it is due for implementation.
First, it has taken the form of a new call for evidence with the title ‘Looking to the future: greater member security and rebalancing risk’ and follows on from the more prosaically titled consultation ‘Ending the proliferation of deferred small pots’.
This statement from the new pension minister Paul Maynard MP reflects the wider ambition. He says: “The small pots solution is just a starting point. I want to understand how we can go further to set out a long-term vision for workplace pension saving. Savers will still be left with multiple pots to manage. This makes it harder to maximise their savings, understand what they have, and manage their retirement funds. Australia has successfully implemented a ‘stapling’ model, based on the idea of a pot for life. I want to understand what the benefits and considerations of this approach are.”
The document references several countries’ models. This includes Australia’s ‘stapling’, which has only been in place since 2021. It also references Mexico’s lifetime provider model, in place since 1997, and New Zealand’s since 2007. It also name-checks Chile’s pension system established by the Pinochet dictatorship in 1981 with a decidedly mixed record in terms of competition between providers, including offers of white goods to switch.
‘Looking to the future’ also includes feedback to the first consultation, some of which is attributed, helping demarcate the industry positions, but also a series of ‘conclusions’ which may form the basis of a government plan. (See box)
It is probably fair to say that the debate is somewhat confused. The new document reads as a composite of new, bold ambitions but also contains details about a more moderate reform of small pots. That clearly has a knock-on impact on determining just how transformational it could be, the administrative problems that it could create, and even whether it is wise to move in this direction.
We also understand that the DWP at least, in conversations with the pension industry, is stressing that this is still at the ‘call for evidence’ stage.
For example, some consultants believe that small pots reform can co-exist with an employer-based system, essentially because the pots will be small. However, the biggest retail adviser SJP has offered the opinion that it will mostly be advised clients using consolidation and that would tell a different economic story at least.
Outline of debate
With such a complex situation to analyse, we have sought some of the key opinions that help show the parameters of the debate.
Becky O’Connor, director of public affairs at PensionBee, said: “A pension could become a bit like having a bank account, into which different employers can pay. It’s good for savers, giving them more say over how they want to grow their retirement fund and hopefully a decent solution to the problem of lost pension pots.
“Pot for life has the potential to shake up the industry, bringing what consumers actually care about to the forefront, boosting competition and bringing the way people engage with pensions into the 21st century.”
The feedback part of the document quotes Hargreaves Lansdown: “The clearing house should be designed so that it could also be used for pension contributions as part of a future lifetime pension. The additional functionality would be to allow payroll contributions to be paid from a participating employer
to the employee’s chosen pension scheme.”
The Pensions and Lifetime Savings Association takes a very different position. Nigel Peaple, director of policy & advocacy says: “We are very concerned at the proposal that the UK should move to a more individualised form of pension provision, called the ‘lifetime provider’ model. Workplace pensions form the vast majority of private pension provision in the UK and our system of automatic enrolment is widely admired around the world. We are not aware of any evidence that moving to a lifetime provider model would deliver better outcomes for members, but it might undermine the essential link between employers and workplace pensions, and introduce higher costs and worse outcomes for some savers.”
Royal London director of policy and communications Jamie Jenkins has been offering a reasonably detailed critique for some time including raising concerns about new admin challenges for employers.
Yet he also sees questions around value for money. “What if a person’s current workplace scheme was particularly good value, because they had a big employer who negotiated a great price. You could be transferring to something that could be two or three times that cost. That becomes material when you’ve got £20,000 in your pot.”
He also sees the potential for significant disruption to the current system. An employer currently might approach a provider with say 100 employees. They want a competitive scheme as part of offering a better package to their employees than their rivals and want a good pension, not a basic one.
With 100 employees, they have some buying power with the provider to negotiate on costs or for extra support say on communications and additional features.
“But if you fast forward, and that same employer doesn’t really have 100 employees to offer to the provider. They could have 20, because 80 of them have other arrangements. The employer’s buying power is lost.
“Could it be anti-competitive, diluting the employer’s buying power or franchise in that equation? Bear in mind, it’s employers who have driven the success of auto-enrolment. Employers have complied and done their job, with many of them going the extra mile.”
Helping disengaged savers
Buck benefits consulting leader Mark Pemberthy says: “Small pots is definitely an issue that needs to be resolved to improve efficiency and overall value for money.
“I agree with the points that Royal London has made, but suspect this predominantly applies to larger and more engaged employers where the workplace pension is a valuable element of the reward proposition.
“For these employers, having one scheme is a big advantage in promoting the scheme to employees and monitoring the performance of investment strategy, ESG transition etcetera, as well as using scale to negotiate low member charges. It also enables them to get scheme level MI showing levels of engagement, forecast retirement outcomes and generate other metrics they may be interested in to make sure the scheme is performing as expected.
“Pot follows member and default consolidator models could both improve these schemes’ ability to negotiate lower charges – by bringing in more assets or transferring out smaller deferred pots respectively.
“However, there are a lot of employers for whom pension is a compliance responsibility rather than a genuine employee benefit. These employers often favour operational simplicity over outcomes. Although it doesn’t seem to be a likely option, they may be grateful that they don’t have to choose a scheme in a pot for life approach if it integrates easily with payroll.”
“So, from an employer perspective I don’t think the workplace market is uniform and a single approach is unlikely to be a good fit for everyone.”
Aegon UK head of pensions Kate Smith says: “Obviously, they’re very influenced by the Australian model, but it’s very different to the UK . One obvious difference is that in the UK employers pay 3 per cent – in Australia it is 11 per cent and will go up to 12 per cent in the next couple of years.
“We have an employer-based system using defaults designed for the least engaged. We now have mix and match policies in the pipeline, some are more employer-centric than others.
“But the changes could be quite seismic, with the growth of new aggregators for small pots, and then as a default solution with lifetime providers.
“And as for employees having the right to ask their employer to pay their pension contributions into a pension of their own choice, employees can ask to do this already in theory, but it’s proposed to give them a right. This is quite a change from the current process where the employer chooses the scheme and will need to involve changes to auto-enrolment legislation if it is to become a reality.
“A clearing house will be needed to make this system work, matching employees with their chosen pension schemes and minimising the payroll burden and employers.
“There may be technology synergies with pension dashboards. So it will be important to explore these to avoid one technology build after another. A UK election is looming, and we don’t know if a new government, whoever they are, will make pot for life a priority over other initiatives such as the Value for Money Framework.
“I can see the benefit of having a really engaged and trusted employer as this improves member outcomes. It will be interesting to see if and how the lifetime provider model develops and what this really means for the mass market as well as those who are or become highly engaged, who make high contributions and select their own pension funds.”
BOX: The plan from the conclusion contained in the call for evidence
The Government will create a clearing house to underpin the proposed ‘multiple default consolidator model’ with an industry delivery group tasked with design.
It will first look to consolidate members into a scheme where they already have a pot. If they have multiple pots with different consolidators, they will be allocated to the scheme which holds their largest pot.
Where a member does not have a pot with an authorised consolidator, members will be allocated an authorised consolidator on a carousel approach. The carousel will divide pots in equal proportions between the authorised consolidators.
The Government will develop an authorisation and supervisory regime for trust-based schemes to act as consolidators and investigate options for a similar framework for contract-based schemes with the FCA.
The document gives a list of features required for suitable schemes such as already qualifying under auto-enrolment, complying with recent initiatives such as demonstrating value for money and offering decumulation services.
It sets out the criteria for pots to be eligible for automatic consolidation including having made no active contributions for 12 months and that pots must be valued at equal or less than £1,000, though that maximum will be reviewed.
The reforms must be in charge-capped AE default funds including Shariah funds. The feedback includes some concerns about the latter issue so the debate on this may one to watch in future. Pots with guarantees are excluded.