The Pensions Policy Institute has warned that the adoption of a lifetime provider model – or pot for life – is likely to be be costly for schemes and employers, and could result in members paying higher charges on retirement savings.
These were some of the headline findings in its report looking at the potential impact on key stakeholders of government proposals to move to a lifetime provider model, which would give employees the right to chose their pension providers, rather than the employer.
The PPI says that the introduction of a pot for life model could create market complications, particularly if providers are forced to spend more on marketing, and with larger schemes potentially poaching more profitable members.
It adds that consolidation within the DC workplace sector is already underway and the adoption of a pot for life model may be easier in future, when there are fewer, larger schemes.
The report says: “Delaying implementation, or delaying the decision about introducing the lifetime provider model until other policy agendas are completed is likely to increase the efficiency of [this] model.”
It adds that a national, purpose-designed data standard will be necessary to ensure proper functioning of a lifetime provider model.
The report says: “In order for a lifetime provider model to achieve cost savings and better services for members, difficulties in matching will need to be addressed, potentially through the introduction of a unique identity number, or through strengthening other matching processes. A robust IT infrastructure will also help ensure the efficiency of the model.”
It points out that there are several pension policy developments taking place at the moment which could help with this including pensions dashboards, consolidator vehicles, clearing houses and value-for-money (VFM) legislation.
The PPI report says: “(VFM) agenda will require a level of data streamlining and standardisation that could potentially also assist with data standard developments. Alongside these, the pot consolidation and clearing house proposals in the Government’s call for evidence are likely to involve the construction of significant infrastructure.”
It adds that in addition to data standards and IT infrastructure, support for members and containment of costs and member fees will be critical.
“There are several ways in which member fees could be impacted, including: through increased provider marketing costs, increased costs for members of schemes who have lost higher valued pots to other providers, costs of policy infrastructure development and, the potential for lower wage increases if employers have to pay more for their advice, payroll or accountancy services.”
The PPI adds that if members end up paying increased costs, this could undo some of the potential benefits of the policy, though they could still, in theory, gain overall if increased costs are outweighed by increased returns, generated through more sophisticated investment strategies, fuelled by higher scheme asset values.
The PPI says that cost increases might be mitigated by future levels of scale if schemes become fewer and larger in size.It adds that this pot for life model could increase member engagement – but adds that there are still “many unknowns”.
The PPI adds that it will be necessary to conduct cost analyses of all of the different policy strands and effects and to have an understanding about how these will be funded long term, in order to calculate the potential impact on members and it would be helpful to conduct this analysis prior to taking the decision to pursue a Lifetime Provider Model.
This initial PPI report doe not weigh the merits of the policy nor conduct a cost/benefit analysis but instead sets out what various stakeholders need to consider if this policy were to be introduced. As part of this analysis it looks at examples from other jurisdictions including Australia, Denmark and Mexico.
Commenting on the report The People’s Pension director of policy Phil Brown says: “Pot for life is an idea worth exploring but implies years of radical change for both pensions and payroll. That’s not just reform of how money gets paid into pensions, it’s also reform of how pensions are sold and regulated. If pot for life is to work, it comes after the groundwork has been laid by government, industry and regulators over a period of years.”
A full copy of its report is available here.
