As Chancellor Hunt reveals plans for the economy, for businesses and for consumers, experts from across the financial services sector have been sharing their reaction to the new pension policy plans for a ‘pot for life’.
With many expectations of the Autumn Statement having widely circulated beforehand about cuts to taxes and national insurance, Chancellor Jeremy Hunt has been on his feet in the Chamber. Thinking back to a year ago when his Autumn Statement followed the disastrous mini-budget of Truss/Kwarteng, his focus then was on calming markets – especially the gilt market. This year, with some headroom in the budget calculations, the fact that a General Election is expected to take place next year cannot be far from anyone’s imagination when hearing today’s announcements and plans that the Government will introduce. But what do today’s pensions measures mean for financial advisers and their clients?
Experts from across the financial services profession have been sharing their reaction to the Autumn Statement pension announcement about the ‘pot for life’ as follows:
As well as retaining the Triple Lock on the State Pension – something which certainly provoked a strong reaction here on IFA Magazine, The Chancellor revealed plans for pension funds, again rumours of which had been widely circulated beforehand, with his plans for a pension pot for life. There were also capital plans for pensions discussed.
Kate Smith, Head of Pensions at Aegon, comments on legal right to stick with existing pension in new ‘pot for life’:
The Chancellor has announced that employees will be given the legal right to pay their pension contributions into an existing pension scheme rather than into their new employer’s pension scheme when changing jobs – the so-called ‘pot for life’.
Currently, under the highly successful automatic enrolment regime, it is the employer who selects the pension scheme provider for their employees, often with the help of an adviser.
The new ‘pot for life’ concept will give employees the ability to select their own pension provider and force their employer, as well as any future employers, to pay their employer and own employee contributions into this chosen pot.
The idea is that this will minimise the current issue of the proliferation of deferred small pension pots spread across numerous pension schemes or providers, with future pension contributions to be paid into a single scheme of the employee’s choice, regardless of however many employments they have during their working lifetime.
We recognise that the ‘pot for life’ may appeal to those employees who take a hands-on approach to their workplace pension and wish to select their own pension provider, including use an existing provider, possibly with the help of an adviser.
However, there are risks of poorer retirement saver outcomes for millions of employees if employers feel they’re no longer at the centre of the pension provision for their employees.
Pension schemes can be used to as a means to attract and retain employees, as well as helping them to achieve greater financial security for life after work, helping them to retire. Many employers go beyond the statutory auto-enrolment 8% minimum by paying higher pension contributions, and by providing employee support to increase their engagement with pensions.
The ‘pot for life’ concept may damage this relationship, and could lead to lower employer contributions and support in the workplace. It could also mean fundamental changes to how workplace pensions work today, so the concept needs careful consideration alongside other pension policy priorities – such as the value for money agenda.
Responding to the Chancellor’s announcement that he would like to give employees the right to ask employers to pay into an existing pension, Gavin Jones, Associate Director at Old Mill said:
“UK workers change jobs, on average every five years and auto enrolment is now more than 10 years old, so many workers could already have a handful of pension schemes, and while it is easy to lose track of what might be small pots of money, added up over a working lifetime, it could dramatically change income in retirement.
“The Government have today set out, in letters to the Financial Conduct Authority (FCA) and the Pensions Regulator, that they are exploring a Lifetime Provider Model, enabling individuals to have one pension pot for life, reducing the barriers to engagement and increasing their control over their pension pots. This is certainly welcome news, but we would like to see safeguards are in place that the pot employees choose to stick with is good value for money and to ensure administration costs will not be prohibitive for employers.”
Richard Parkin, Head of Retirement at BNY Mellon Investment Management, in response to the one pot for life initiative said: “We welcome the Chancellor’s announcement to look at how we address the issue of small pots that has resulted from automatic enrolment, and to give individuals more choice over their pension provider. In principle, offering consumers a choice of their workplace pension provider and the chance for continuity seems sensible and provides the opportunity to have a clearer picture for retirement planning. However, we must recognise that many consumers are often ill equipped to make a choice of provider and there is a risk that they choose their pension provider based on the quality of marketing rather than the quality of the product.
“Helping individuals have their pensions in one single pot usually makes sense, but if that pot is held in a poor-quality product then this could result in worse outcomes for individuals. If this approach is pursued, there will have to be some minimum standards educating individuals and maintaining competition and fair service in the industry. Advisers may also have a role to play, as it is imperative that consumers do not sleepwalk into a long-term pension provider and instead continue to interrogate the best solution to meet their goals.”
Also commenting on the pot for life plan, Gail Izat, Managing Director for Workplace at Standard Life, part of Phoenix Group said: “While we wait to see the detail of the consultation, the idea of a pot for life would need careful thought given the practical considerations around implementation and the potential distraction from existing initiatives. A pot for life might be appealing from a simplicity perspective as the pension could follow people from job to job but there are bigger priorities facing savers and the pension industry that we would tackle first. These include ensuring contribution levels are adequate to provide people with a decent retirement income, identifying ways to extend advice and guidance to those struggling to make decisions and implementing the government’s value for money framework that will empower people to determine whether their pension offers good value.”
Jon Greer, head of retirement policy at Quilter comments on the pot for life also saying:
“Changes in working habits mean people who might have had just one or two jobs during their lifetime now tend to move far more frequently and thanks to auto-enrolment are building up multiple pensions, often with little in them.
“The issue surrounding small pots was raised in a DWP consultation earlier this year while Laura Trott was still Pensions Minister, with the idea of a pot for life mentioned as “a more fundamental change that may emerge … but was clearly some way off”. However, Trott appears to have made her mark on the Treasury only a week into her new role, as it is with some coincidence that a ‘pot for life’ proposal, and likely a call for evidence, has now landed in the Chancellor’s Autumn Statement. The idea marries nicely with the Chancellor’s aim of funnelling more money into the UK economy through a concentration of workplace pensions who are able to do so.
“Currently, eligible new employees must be automatically enrolled into a pension scheme of their employer’s choosing. Today’s ‘pot for life’ proposal will change this by ensuring the pension pot can move with the employee from job to job, which would help resolve the small pots issue caused by the current system.
“Though this proposal sounds positive on the surface and will be useful for those members who are keen to take ownership, it has flaws. The ‘pot for life’ would likely take a long time to gain traction, not least because the majority of workplace pension savers are largely disengaged. They simply trust that their employer gets on with setting up their pension through the auto enrolment process and they therefore may not be keen to engage with a system that requires them to play a more active role.
“The success of auto-enrolment has been built on inertia. While new data shows 88% of eligible employees participated in a workplace pension in 2022, there is scant evidence that people will engage to the point of making an active choice to stay in a scheme or choose a particular scheme in the first instance. The engagement required may have no basis in reality unless the pot moving with a scheme member is the default, and this would require a total overhaul of the current system which doesn’t appear to be part of the plans.
“In addition, to gain traction this ‘pot for life’ proposal would likely have to follow the Australian model whereby the active pot is the member’s pot for life unless they actively choose an alternative provider. It is also unclear whether members would make logical decisions, particularly as we could expect to see workplace pension providers advertising to a member directly to join their scheme.
“A key concern raised earlier in the year during the original consultation was that businesses may be reticent to adopt this system as it could put additional administration burden on them. However, the legal requirement to facilitate a ‘pot for life’ will mean employers must support their employees looking to take ownership. The current auto-enrolment system is predicated by slick payroll systems, and engagement, time and investment will be required to adjust to this change.
“It is positive that the government is paying closer attention to pensions savings and that it is implementing changes such as the ‘pot for life’, but it is important it doesn’t let its other pensions commitments fall by the wayside. Pensions dashboards have been repeatedly kicked down the road but remains incredibly important to help people locate the £27bn currently held in ‘lost’ pension pots. When, or if, the ‘pot for life’ proposal comes to fruition, savers will still have multiple pension pots to keep track of so this must not be forgotten.
“Though many unanswered questions remain, the introduction of a ‘pot for life’ represents a significant alteration in the world of workplace pensions and will have long lasting impacts on people’s retirement savings.”
Commenting on proposals to allow workers to divert workplace pension contributions to a scheme of their choice, Laura Myers, Head of DC and Financial Wellbeing at LCP said:
“The current system delivers high quality and low-cost workplace pensions to millions of workers, and these proposals risk undermining that system. At present, employers act on behalf of their entire workforce, benefiting from competition from pension providers, and negotiating a good deal for high and low earners alike. In a ‘pot for life’ system, the pensions industry will inevitably seek to ‘cherry pick’ high earners, whilst ordinary savers get left behind. Inertia will remain a powerful force, with many workers, who can’t afford expensive financial advice, simply staying where they are but their workplace scheme will now be less attractive to providers who may well increase charges to make up for the lost contributions of high earners. In addition, employers may reconsider if spending money on their pension scheme is a good investment if many of those who may benefit are no longer current employees.. If this happens then a large number of pension savers will lose out.
“If individuals have total freedom where to direct their pension contributions, they will also be exposed to much greater risk of making sub-optimal decisions. There will be a growth in the number of organisations offering to be the home of workers’ pensions via glossy marketing campaigns but not necessarily offering best value for savers. There is also the ever-present risk of workers falling foul of illegal scams and this will need to be strictly regulated to avoid this being a field day for scammers.
“If change is needed to deal with the problem of small pension pots as workers change jobs, alternative ideas such as ‘pot follows member’ could help to avoid this problem, but without undermining the foundations of the current system of workplace pension provision”.
Jamie Jenkins – Director of Policy, Royal London said:
“Pensions are now firmly linked with the economy, and there is clearly affinity between long term investments and long-term funding needed to encourage growth. We welcome the consultative approach to the major structural changes proposed. It’s crucial that we now work through the detailed implications to understand which of these changes will actually serve the objective of supporting economic growth, while improving outcomes for savers.”
Pot for life
“Allowing members to choose their own pension scheme sounds like a great idea but, in practice, workplace pensions already offer more investment choice than most people need. And they are highly regulated with capped charges, whereas this change could lead to a pensions system dominated by prolific marketing, higher charges, and ultimately some higher risk pension schemes.
Automatic enrolment into workplace pensions has been a huge success story and the relationship between employers and their employees is pivotal to this. A ‘pot for life’ model would significantly undermine this dynamic by requiring employers to navigate an increasingly complex array of payments to different providers. Ultimately, it may disenfranchise the very group of people we’ve relied upon to deliver the successful rollout of automatic enrolment.
If we really want to engage future generations in their retirement savings and address the proliferation of small pension pots, we should focus on a digital solution by delivering a fully functional pensions dashboard.
The idea of member choice comes from the Australian pensions system, but if we can learn anything from Australia, it’s the amount they save. The minimum employer contribution is approaching 12%, compared with 3% in the UK. Embarking on a huge project to change the operating model for pensions won’t compensate for this disparity and may simply serve as a distraction, perhaps a decade of distraction. At some point we will need to start facing up to the challenge that we need to save more.”
Commenting on Scheme consolidation, Jenkins said: “There is clearly merit in having fewer, larger schemes in terms of creating greater scale and reducing regulatory burden, but care must be taken to ensure this is centred in the interests of members, either to secure or improve benefits in retirement.”
Gianpaolo Mantini, Partner at Saltus said:
“In theory, this is a nice idea. The Pension Policy Institute estimates that just under two thirds of UK adults have multiple pensions, and of those, around 6.6 million are aware of having at least one ‘lost’ pension pot, the value of which is estimated to be more than £26 billion in 2022.
“Therefore, a ‘pension pot for life’ would look to address this issue and potentially improve individual wealth at retirement and reduce pressure on the state. This could be improved further if employees could also insist on employers paying into newly established pensions (such as SIPPs) in addition to existing workplace schemes, some of which are limited in their ability to provide for flexible drawdown.
“That said, this is just consultation, so it might not happen at all, and even if it does, it would represent a major shift in payroll and benefit operations for employers and would be very hard to achieve practically.
“Pension companies facilitate contributions and payroll in completely different ways and have different levels of data access for employers. HR departments could fall over trying to deliver this. Rather than needing a grasp of one platform, they will need to use multiple schemes which could cause them to lose oversight and increase costs.
“Furthermore, the archaic pension industry moves at a snail’s pace. For example, the pensions dashboard– announced in 2015 and originally meant to be live in 2019 – is still not up and running. Delivery is now planned for 2026 and schemes may only be expected to provide their data voluntarily. It seems unlikely then that this could also include the ability to facilitate centralised corporate contributions. This revolutionary suggestion might quickly hit a hard wall of reality.”
Commenting on plans for a call for evidence on offering employees the option to choose which pension scheme their employer contributes towards – a ‘pot for life, James Carter, Head of Platform Product Policy, Fidelity International, said: “A ‘pot for life’ model would radically change the UK pensions market and risk removing the benefits of workplace pensions and the regulatory and governance framework which protects members of workplace pension schemes. We question the extent to which this would improve member outcomes, also because it would dis-intermediate employers from their role in supporting the financial wellbeing of employees through the workplace.
“We strongly agree with the need to address the proliferation of multiple small pots held by UK savers. A key part of tackling this challenge lies with the development of the pensions dashboard, and providing consumers with multiple pots a single, consolidated view of their pension wealth. We have also been deeply involved in considering possible solutions as part of the Small Pots Cross-Industry Co-ordination Group.
“Today’s launch of a call for evidence will enable further discussion and the opportunity to have a complete and robust debate which we welcome.”
Mike Smedley, Partner at Isio comments on the Pensions developments announced during the Autumn Statement:
“TheChancellor has headed to the outback for his Pensions solutions. The pot for life is going to revolutionise pensions in ways we haven’t yet imagined. It will change the dynamic between employers and employees and the consequences are uncertain. The big difference is we have thousands more schemes than Australia does, and the UK’s pensions landscape is much more complex.
The pensions industry and employers aren’t ready for this yet.
We believe that the PPF as a public sector consolidator is unnecessary and could take years to come into operation. We already have a number of innovative consolidation approaches developed by the industry that already function well and are delivering the benefits of consolidation; improving the quality of governance, investment efficiency and member experience. We should be supporting these as an industry rather than waiting for a national scheme to emerge.”
Elliott Silk, Head of Financial Planning, atomos, said when commenting on the pot for life:
“It could place a burden on employers and payroll to pay contributions into multiple different pension plans compared to sending money to one place as they do at the moment. It may also raise the cost of pensions, as providers might not be able to offer the low charges that they do on group personal pension plans because the efficiency of being paid contributions from one source will be diminished. It may be easier for people to accumulate through one plan, but we will continue to watch this space.”
Lily Megson, Policy Director of My Pension Expert, said: “Although the auto-enrolment scheme has helped ensure all employees build a pension pots, one of its inherent flaws has been to actually stifle pension engagement – it is a box that is ticked, and people do not closely monitor how much they are saving or how their workplace pension is performing. So, the ‘pot for like’ initiative is a good one. It will give people choice over how and where they build their pension pot. But on its own, the pot for life is doomed to fail. Further efforts must be made to ensure people engage with their pension, and better plan for retirement. Improved access to pension information and independent financial advice will be vital to this. Without it, we risk seeing pension engagement remain stagnant for the foreseeable future.”
