Learning from the pension systems of other countries makes sense. But we cannot always ‘cut and paste’ policies between countries which may have a totally different pensions history, different labour market conditions, different financial institutions and so on.
This can clearly be seen in the current government’s drive to make the UK pension system look more like the Australian system.
There are, of course, many respects in which the Australian system is laudable. But the very fact that Australian policy has been developed against that backdrop should make us pause before assuming that it can be transplanted into a UK system where it is less than five years since automatic enrolment was fully up and running for all firms and at 8 per cent contributions.
One Australian policy which has caught the eye of UK ministers is giving people a single ‘lifetime pension provider’ by ‘stapling’ people to their first pension scheme and then diverting future contributions back to it by default.
In the version floated by DWP, a potential first step would be to give people ‘member choice’ about where their workplace pension contributions end up. A worker could ask their firm to direct contributions (employer and employee) to a nominated pension scheme – such as a pension set up in a previous job – rather than to the employer’s current scheme.
At first sight, such an idea seems highly attractive. Why shouldn’t engaged consumers be able to pick a pension pot to receive future contributions and potentially avoid creating a new pot every time they change job?
The short answer is that shopping around for workplace pensions is very different to shopping around for the best mobile phone contract.
One of the great advantages of automatic enrolment is that around 10 million people who had no pension are now starting to save in a workplace pension chosen for them by their employer. Those working for a larger firm may well find that their employer has negotiated a good pension arrangement for them with one of a number of competing pension providers.
If individuals can shop around, the same 10 million new pension savers risk losing out. Their pension pots will typically not be large enough to be of interest to the financial services industry. Instead, there will be a battle for the pensions of higher earners. And, if higher earners leave their current workplace pension, we could easily see costs increase for the remaining members. This is because the charges paid by high earners currently subsidise the cost of providing pensions to low earners.
Second, choosing the best pension is far from straightforward. How are members expected to choose? Presumably they should not focus purely on charges. So, are they to compare investment strategies or post-retirement offerings or the range of non-default funds or customer service standards? For many people it would be incredibly difficult to judge between different schemes and they may be more swayed by the most convincing TV adverts or slickest app. It is far from clear that this would lead to better outcomes, even ignoring the increased marketing costs which would ultimately be borne by savers.
There is also the huge cost of building the infrastructure needed for all of these changes. We already have the cost of the pensions dashboard, and next will be the ‘clearing house’ needed for sweeping up micro pension pots into ‘multiple default consolidators’. With member choice we would need another clearing house process so that employers could direct contributions to the many different schemes chosen by their employees. Someone, somewhere is paying for all of this, and it’s usually the member.
Fragmented pensions are a challenge for the UK pension system, but there are ways to address this problem without abandoning the buying power of employers for their entire workforce. A better approach would be an update on ‘pot follows member’ where small pension pots follow workers as they move jobs rather than being left behind. In this way people accumulate fewer, larger pots and are more likely to engage, especially as their pension is more likely to be with the current provider in their current workplace.
There is a strong case for the government getting the basics right, including implementing the next steps on expanding automatic enrolment, and giving these other reforms time to bed in before moving on to wholesale reform based on limited evidence.
