Following the King’s Speech this morning, Kirsty Anderson, retirement specialist at Quilter, has shared her detailed analysis into the key elements of the Pension Schemes Bill as follows:
Small pots:
She said: “In today’s King’s Speech, the Labour party has included the consolidation of defined contribution small pots in their legislative agenda, addressing a crucial issue in modern retirement saving.
“Our working habits have drastically changed over the last few decades. Previously, individuals might have had one or two jobs during their lifetime, resulting in one or two pensions. However, with the rise of auto-enrolment and more frequent job changes, people are now accumulating multiple small pension pots. This unintended consequence can complicate retirement saving and may even cost savers money.
“Labour is picking up the baton from the previous government, which had already consulted on this issue. It’s important to push ahead with this legislation to ensure the market works best for savers and it also helps to lay the groundwork for a shake-up to auto-enrolment.
“A big issue for pension providers is dealing with small pots, especially those less than £1,000. These can actually lose money for providers due to administrative costs. On average, it costs about £20 annually to administer a deferred pension pot. For a pot of £350, if a provider is only recouping £1.40 per year through a 0.4% annual charge, this can quickly turn into a loss.
“If you have multiple small pots, you could be paying unnecessary administrative costs. Some providers may offset their losses by charging higher fees on larger pension pots, meaning you could be cross-subsidising the costs associated with managing smaller pots. Consolidating your small pots can save money and simplify your retirement planning. It reduces the administrative burden of managing multiple pots and minimises the chance of losing track of your pension funds. In 2022, the value of lost pots was estimated to have reached £26.6 billion, which could have been avoided.
“There are three main options being considered for managing small pot consolidation:
- Pot follows member: Your pot moves with you from job to job. This option is slower and requires more transfers, which might mean higher costs, but it keeps your pot linked to your current employment. Businesses may also be reticent to approve this as it could put an additional administrative burden on them.
- Single default consolidator: All small pots are transferred to a single entity. This could lead to substantial initial costs but provide benefits such as economies of scale and simpler administration in the long run.
- Multiple default consolidators: Small pots are divided among multiple consolidators. This might mean less administrative burden as many providers already hold a high concentration of small pots.
“A move to any of these proposals would represent a significant shift in the workplace retirement saving arena and pave the way for further reform to come.”
The need for schemes to offer retirement products and value for money:
“By placing duties on trustees of occupational pension schemes to offer a retirement income solution or range of solutions, including default investment options, the government hopes to improve outcomes for savers and lead to more funds being invested for longer. This has the potential to boost economic growth through investments in productive assets.
“With the growing dominance of defined contribution pension schemes and the freedoms they offer, people’s strategies for taking income from their pensions are now of paramount importance. Decumulating from a pension can be treacherous, particularly without expert help, and savers can easily see their retirement pots run dry before they pass away.
“While the work under the previous government has not proposed exactly what products and services should be offered by providers, it intonated a framework to improve the market. One area it is heavily encouraging is the inclusion of Collective Defined Contribution (CDC) plans. CDCs aim to provide a halfway house between defined benefit and defined contribution pensions by offering a regular income and addressing issues related to market volatility and sustainable withdrawal rates. However, CDCs are largely unproven, and no market currently exists.
“The government is also keen to ensure savers get value for money from their pension schemes. This includes clear disclosure of investment performance, costs, and service quality.
“While this focus is welcome, there remains the problem that too many people are not accruing enough into their pensions in the first place, so their decumulation plans already start from a difficult point. According to the 2022 Financial Lives Survey by the FCA, just under half of people aged 18-54 have reviewed their pension pots in the last year, compared with 65% of those aged 55-64. This isn’t surprising for those in their early 20s or 30s given the competing demands on their pay, but as people move from their 30s to 40s, it is important that they at least understand where they stand.
“We need to view the retirement market holistically and ensure that more savers are engaging with their pensions earlier in life. Giving more people access to advice or guidance in differing formats throughout their financial lives will improve the market immensely.”
