Pension ‘pots for life’ make as much sense on these shores as they do in other countries, where they are already up and running.
Firstly, the need is clear. New research by the Centre for Economic and Business Research on behalf of PensionBee estimated that around £50bn is now at risk of being lost in old workplace pensions – a higher estimate than previous modelling has suggested. The total number of UK pension pots is expected to rise by 130 per cent by 2050 to 243m. One in 10 workers thinks they have lost a pot worth more than £10,000, although smaller pots are more likely to be lost than bigger ones. There are already an estimated 4.8m pots considered lost in the UK.
The number is big and growing. For individuals who lose track of old pots, it’s an awful lot of retirement income to potentially miss out on. Particularly at risk are those currently in their early years of work, who change jobs more frequently and are more likely to forget about old pensions as they move through working life. They stand to lose potentially five figure sums from their eventual retirement pot through forgetting about old pensions, even if at the time, those pots seemed rather insignificant.
But of course, implementing a change in pensions is always more complicated than simply adopting a good idea and running with it — as we have seen with the painfully slow development of pensions dashboards.
But the idea of a lifetime provider has attracted more instantaneous criticism than pensions dashboards ever did. Even if enthusiasm to make the latter happen is wanting, there is at least broad agreement it is a good idea.
In contrast, there are many experts who feel strongly that pension savers being able to pick their own lifetime provider for their retirement savings is a terrible idea. There are fears of price hikes for those left in employer-chosen schemes. There are concerns that the challenges of implementation, such as the introduction of a central clearing house, would be costly and cumbersome for the industry. Not only would providers have to change their processes, they would also have to change their business models to some extent, marketing directly to consumers.
Concerns about these extra marketing costs are often been cited; the suggestion being that these costs would inevitably be passed on to consumers. There are also fears people would pick the wrong pension if left to their own devices and attracted only by shiny marketing, as well as, of course, the risk of scammers using this as yet another opportunity to part people from their life savings.
So the idea has been stamped on from the get-go with multiple objections from the industry, but primarily on the basis of fears of cost rises to providers, which could mean higher fees for savers.
However, it can’t be avoided that the lifetime provider model works elsewhere in the world. Other countries have surmounted transitional challenges. There is precedent — we would not be the pot for life pioneers. How we might apply the lessons from other countries to our own transition to this brave new pensions world is worth discussing.
There may be costs, yes, but there also might be benefits. It’s possible there could actually be cost savings, for instance, through increased competition and efficiency. It’s probable that higher engagement, through making it clear that responsibility for private pension saving is the individual’s own and no one else’s, would lead to higher contributions and better outcomes, rather than the situation we have now, where far too many people don’t have a clue about the pension they are paying into.
Anything that moves away from a culture in which a pension is something that is done ‘for us’ towards something that is done ‘by us’ is a good thing in my book. Savers are ultimately responsible for their own retirement outcomes already. But for the most part, this penny doesn’t drop until retirement looms.
Having a lifetime provider has the potential to get people engaged far earlier, at the start of accumulation process, not the end of it. This is the real game changer the model presents. It’s the cultural change in how people view their own pensions that is the potential prize of these proposals. It’s a prize worth having, as we can see from experience elsewhere in the world.