Autumn Statement 23: Industry divided over pot for life proposals

The Chancellor’s proposals for a ‘pot for life’ approach to pensions have divided industry experts, with a number of concerns raised over the increased burden that could be placed on both employers and workers.

The Chancellor launched a call for evidence on a new 'pot for life' pension model as part of his Autumn Statement today (22 November).

Some industry organisations have been quick to welcome the proposed changes, with PensionBee director of public affairs, Becky O’Connor, arguing that the pot for life is a “great solution to the problem of people having lots of old pensions from multiple jobs”.

A pension could become a bit like having a bank account, into which different employers can pay,” she continued.

“Pot for life has the potential to shake up the industry, bringing what consumers actually care about to the forefront, boosting competition and bringing the way people engage with pensions into the 21st century.”

However, People’s Partnership chief executive officer, Patrick Heath-Lay, warned that a pot for life could improve the UK’s pensions system or pull it apart depending on how it’s implemented.

“It's vital that Jeremy Hunt explains how the proposed new market for workplace pensions will work, how it will be regulated, and most importantly, how millions of savers will be protected,” he continued.

“The Chancellor needs to show how pot for life will continue to build large-scale pension funds that can make strategic investments in the UK and how it will enhance, rather than detract from, the enormous success of automatic enrolment.”

Indeed, Pinsent Masons pensions partner, Simon Laight, suggested that a shift towards a pot for life would mark a “seismic reform for pensions”, pointing out that if the buying decision is moved to the employee, pension providers will have to re-engineer their distribution channels.

Laight continued: “They’ll be selling to individuals, rather than to corporates, converting workplace pensions savings into a retail market. There won’t be financial advisers to serve the market, so direct to consumer will become dominant.

"The bigger providers will be able to adapt – improve the attractiveness of their proposition, find introducer arrangements with affinity groups, invest in sales drives. It will lead to consolidation with an expected smaller number of larger providers.

“Buying a pension is fundamentally different from shopping around for petrol. Not everyone is knowledgeable on pensions and consumers need protection as they might mis-buy. We need to guard against the pension misselling scandals of the past.”

These concerns were echoed by RSM UK head of pensions, Ian Bell, who argued that in addition to financial literacy concerns, there is also much apathy generally around the importance of pensions until workers get close to retirement age, by which time it is often too late to improve the situation.

"Expecting employees to select the best fund to give them a comfortable later life will be something many will not be equipped to do, and seems likely to result in poor outcomes and poverty for many future retirees," he stated.

"We’d therefore urge the government to prioritise improving financial literacy and education around pensions if this is the direction the Chancellor wants to go in.’

Member understanding is not the only area of concern, as AJ Bell head of retirement policy, Tom Selby, argued that the burden on employers would be “the biggest sticking point to these proposals”.

“Currently, UK firms of all sizes – from corner shops to multinationals – are required to set up a workplace pension scheme for their staff,” he explained.

“This is already a significant administrative undertaking, but forcing businesses to connect to any pension scheme an employee chooses could significantly increase that burden at a time many are struggling in the face of high inflation and soaring interest rates.

“Some sort of clearing house would therefore be needed to channel member contributions to multiple schemes, with slick processes so firms are able to easily connect. That won’t come cheap, so the next obvious question is how much could that project cost and who will pay for it?"

Selby also suggested that attention should instead be focused on key reforms already underway, arguing that, given the amount of work that has gone into building dashboards, it is crucial the pursuit of any new reforms doesn’t derail those plans.

Some in the industry have also suggested that there may be political motivations at play, particularly ahead of a potential general election, warning that this could lead to unintended long-term consequences.

“Pension saving is, by its nature, a long-term problem," Barnett Waddingham partner and head of DC, Mark Futcher, stated. "The government must not be allowed to play fast and loose with the rules simply because it has an eye to an election in a year.

"There is plenty of room for change in the UK’s pension system, but it will only succeed if adequate time, resource, and effort is put into building it. For a ‘pot for life’ to work, there must be a robust central clearing house, a working pension dashboard, and a faultless administration system that directs contributions and amplifies the employers’ critical role in ensuring value and good governance.

"Twenty-four hours’ notice to a system overhaul can only result in one thing; chaos.”

These concerns were shared by Equisoft products director, Nick Meredith, who argued that "this is groundhog day for the pensions industry as political interference from on high is set yet again to trump the advice from the sector in dealing with the growing problem of ‘small pots’ pensions".

"Six months ago, it appeared the government had decided on the consolidator model," he continued. "Now the ‘pot for life’ option is seemingly the preferred option without any apparent industry consultation or guidance into the decision-making process.

"For ten years the industry has supported the ‘pot follows member’ solution which is not only better value to the taxpayer but is less complex and more open to competition driving down costs and improving efficiencies.

"We believe that as it stands today this proposal is too complex, risky, expensive and will take significant time to deliver. In the meantime, the small pots problem continues to grow, and consumers are losing real value as their pensions wither away."

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