MP calls for shift towards lifetime pension provider model in new bill

A bill looking to give employees the right to have their employer pay their pension contribution to a pension of their own choosing has been scheduled for a second reading on 17 March 2023.

The bill, introduced by MP Anthony Browne under the Ten-Minute Rule, proposes making a "small legislative change" to give employees the right to opt out of their company pension scheme without losing pension contributions.

Under the proposals, a new employee would be given the right to direct their own and their employer’s contributions to a provider of their choice and, when they change job, they could make sure their new employer’s contributions go into their own pension pot.

The employer’s contributions would be required to be of the same value as the contributions it makes to its existing company scheme, to make sure that employees who opt out are not penalised.

Introducing the bill in the House of Commons, Browne warned that "millions of people have been building up multiple pension pots, one for each job", explaining that this makes
hard for people to track their total pension savings and to plan properly for retirement.

"It is a lose-lose situation for pension members and pension providers and, overall, it erodes public support for pension saving," he stated, noting however, that work is underway to address this, with the government recently launching a consultation in this area.

In particular, the government consultation focused on two large-scale automated consolidation solutions, a default consolidator model, where each small deferred pot would be automatically transferred to a single scheme, and pot follows member, where deferred pots follow the worker and are added to their new active pot.

However, Browne stated that whilst these solutions have merits, another policy, which is not being actively considered at the moment, has been adopted by many other countries—the so-called pot for life.

He stated: "The objective of a pot for life, sometimes known as the lifetime provider model, is that workers have a single pension pot that they can easily manage and know the extent of their savings.

"This is clearly a big change from where we are now, and I am not suggesting that we should suddenly go to an automatic lifetime provider for all, which would be impossible practically, but there are many different ways of setting up the lifetime provider model.

"What I am proposing is a small legislative change that gives employees the right to opt out of their company pension scheme without losing pension contributions."

Browne also argued that concerns that the proposed model would increase employers’ administrative costs, particularly for small businesses, as they would have to pay contributions to multiple schemes, have been "overegged".

"Pretty much all companies now have automatic payroll systems or a payroll service provider that can pay salaries into different bank accounts and pension contributions into different pension funds," he continued.

"There are concerns about the impact on existing company pensions, but that can be easily mitigated. It is an opt-out system, so the change can be gradual and the effect on existing schemes incremental.

"After a long time, when the scheme has bedded in, a future government might decide to make it automatic, as has happened in Australia. The industry may want to set up a platform to process all the different payments."

Browne also clarified that this proposal is intended as a "supplement to, rather than a replacement for, the different proposals that the government are currently considering".

He continued: "My proposal will not deal with the existing stock of millions of deferred pension pots, which the consolidator model would help to address, and it could exist alongside the pot follows member regime.

"Employees would be given a choice of solutions. If the overall solution is better in the long term for pension members, we should pursue it.

"Ultimately, it is my belief that pension savers should be at the heart of our pension system and that the north star of our pension policy should be a pot for life.

"That means that people know exactly what they have in their pension pot, helping them to make informed decisions about their level of contribution and to plan for their retirement based on this knowledge. Such an approach would help to restore trust in our great pensions system.

"A solution to multiple pension pots should help engaged pension members while protecting the less well engaged. It should not be skewed by only addressing the providers’ concerns with small pension pots."

Hargreaves Lansdown head of retirement analysis, Helen Morrissey, welcomed the bill, arguing that the idea of a lifetime provider model is a "vital part of the puzzle to drive up engagement with pensions, especially with so many people saving in defined contribution pensions".

“It could make a demonstrable improvement in the number of small pension pots we see in the market and people would be less likely to lose track of what they have," she continued.

"Accumulating savings in one pension will also help people engage more easily as they have a better idea of exactly how much they have, and this will aid decision making and improve retirement outcomes."

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