Pension savers could have a “pot for life” under plans to tackle the problem of people building up lots of smaller pots when they move from job to job.
The Government wants to hear evidence on a lifetime provider model, which would allow people to have contributions paid into their existing pension scheme when they change employer, providing greater control over their pension.
Currently, employees are automatically placed into the workplace pension scheme chosen by their employer. Older pension pots may end up being forgotten about by workers or languishing in schemes with poor returns.
Some estimates suggest the average worker changes employer around 11 times during their career, with each job hop potentially creating a new pension scheme with a new provider— Rachel Vahey, AJ Bell
The plans were confirmed in Wednesday’s autumn statement.
A letter addressed to Nikhil Rathi, chief executive of the Financial Conduct Authority (FCA), signed by Chancellor Jeremy Hunt and Secretary of State for Work and Pensions Mel Stride, said: “Today, we set out a vision for the pensions market in 2030 that ensures there are suitable retirement options for savers supported by a streamlined pension provider market that is continually challenged to deliver value for every member.”
The letter highlighted the “exploration of 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”.
The letter also outlined a vision for a more consolidated market, with “fewer, larger, well-run, defined contribution schemes delivering value for their members, including automatic consolidation of deferred, small pots and through diversified investment strategies – with consolidation of those that cannot offer this and a greater regulatory focus on member outcomes”.
The latest estimates suggest 'lost' pensions are now worth at least £27 billion, and still increasing— Rachel Vahey, AJ Bell
The letter was dated November 22 and a copy was placed on gov.uk.
Rachel Vahey, head of policy development at AJ Bell, said: “Some estimates suggest the average worker changes employer around 11 times during their career, with each job hop potentially creating a new pension scheme with a new provider.
“The latest estimates suggest ‘lost’ pensions are now worth at least £27 billion, and still increasing. The Government now wants to investigate the idea of giving pension savers the legal right to choose which workplace pension scheme receives their contributions when they switch jobs.
“Employees would potentially benefit from greater choice and flexibility, while the broader auto-enrolment market would be subject to competitive forces that are comparatively weak at the moment.
“The biggest sticking point to these proposals is the burden on employers. Currently, UK firms of all sizes – from corner shops to multinationals – are required to set up a workplace pension scheme for their staff.
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— Richard Parkin, BNY Mellon Investment Management
“This is already a significant administrative undertaking. But forcing both large and small businesses to connect to any pension scheme an employee chooses could significantly increase that burden.
“Some sort of clearing house would be needed to channel member contributions to multiple schemes, with slick processes so firms are able to easily connect.”
Richard Parkin, head of retirement at BNY Mellon Investment Management, said: “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.
Ensuring that after multiple jobs your pension could follow you for life is a welcome idea. It will require significant change in the current default arrangements for many employees and may be an admin headache for employers— Lee Clark, RBC Brewin Dolphin
“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.”
Lee Clark, financial planner at RBC Brewin Dolphin, said: “Currently, employers automatically enrol new staff into a pension scheme chosen by the company.
“This can result in employees accumulating multiple different pension pots throughout their career.
“Ensuring that after multiple jobs your pension could follow you for life is a welcome idea. It will require significant change in the current default arrangements for many employees and may be an admin headache for employers.
“But it is a welcome move if it helps kick-start a savings culture and helps individuals in their retirement planning.”
Laura Myers, head of financial wellbeing at consultants LCP (Lane, Clark & Peacock), said: “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.
The Government's thinking on the lifetime provider model is rightly at an exploratory stage and they acknowledge the potential difficulties. We think the proposal is worth a thorough exploration, although it would take years to implement— Phil Brown, People's Partnership
“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.”
Phil Brown, director of policy at People’s Partnership, provider of the People’s Pension, said: “If implemented, we think that this package would bring the workplace pensions market closer to the retail banking market. Fewer, larger providers, offering similar products and with savers able to choose who to save with. This could be an attractive evolution for the market but it’s a long way off and the regulatory and practical challenges are huge.
“The Government’s thinking on the lifetime provider model is rightly at an exploratory stage and they acknowledge the potential difficulties. We think the proposal is worth a thorough exploration, although it would take years to implement.”
