Savers could be given new powers to choose their own workplace pension scheme rather than relying on the one chosen by the business they work for.
Under current auto-enrolment rules, employers currently choose a workplace pension to put all staff in, meaning workers build up lots of different pension pots that can hard to keep track of as they switch jobs.
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The Treasury is seeking views on moving to an Australian-style system where the employee chooses the pension scheme that contributions go into, making it easier to keep track of their retirement savings as they move jobs and climb the career ladder.
A call for evidence from the Treasury says the original auto-enrolment system was based on staff having a “job for life” but now employees have 10 pots across their working life on average.
It suggests a lifetime provider model would keep staff more engaged with their pension savings, highlighting that only 25% of people contributing to a defined contribution pension were highly engaged while almost have not reviewed it in the past 12 months.
The Treasury also said it would introduce a multiple default consolidator model to help authorised schemes act as a consolidator for eligible small pension pots under £1,000.
“Building up multiple pots makes it difficult for individuals to understand the totality of their pensions savings and increases barriers to engagement, such as multiple online logins and passwords, and benefit statements,” says the Treasury.
“It also increases the likelihood that savers will lose valuable savings by forgetting or losing track of previous pots they have accrued.”
How would a pension pot for life work?
Lifetime provider models are used in countries such as Australia, Chile, Mexico and New Zealand.
They give individuals more control of where their own and their employer pension contributions go.
In Australia, employers must check whether an employee has an existing super fund before making contributions.
In New Zealand, employees can select a scheme to save in or be defaulted into a scheme when starting a new job.
Contributions are paid to the Inland Revenue, who pass these onto the correct scheme.
The Treasury is seeking views on how this could be designed but suggests there would need to be a central clearing house and default consolidator.
Its call for evidence recognises there would need to be “significant change” but says a lifetime provider model should have defaults to combat inertia and could reduce the overall number of different DC schemes.
It also proposes a voluntary system where an employee selects a scheme from a previous employer that follows them to different jobs.
“This approach could enable savers to in effect create their own lifetime provider in advance of any larger structural and technological changes needed to move to a wider single lifetime provider model for less engaged members,” the Treasury says
While commentators welcome the flexibility and focus on pension saving, there are doubts about how successful this proposed policy shift could be.
Jon Greer, head of retirement policy at Quilter, highlights that the success of auto-enrolment has been built on inertia, which may not be replicated if individuals are made more responsible for their own scheme.
“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,” he says.
“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.”
He also questions how this fits in with plans for pension dashboards, that were meant to give savers a digital view of all their retirement pots.
Kate Smith, head of pensions at Aegon, says 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, but there are risks if people are not as engaged.
“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,” she says.
“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.”
Marc Shoffman is an award-winning freelance journalist specialising in business, personal finance and property. His work has appeared in print and online publications ranging from FT Business to The Times, Mail on Sunday and The i newspaper. He also co-presents the In For A Penny financial planning podcast.
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