Lifetime provider proposals could risk 'throwing away' AE gains, ABI warns

The government’s plans to introduce a lifetime provider model could “fundamentally” change the role of the employer and have a negative impact on outcomes for savers, research from WPI Economics, commissioned by the Association of British Insurers (ABI), has suggested.

The research, which included views from over a thousand employers, found that, under the proposed changes, 57 per cent of employers would take less interest in the quality of the scheme that they would choose for the employees who remain with their workplace provider.

In addition to this, nearly two thirds (65 per cent) said it would be more difficult to assess the quality and value of a pension scheme for employees under the proposed reforms.

There were also concerns around the administrative impact, as the research found that nearly two thirds (63 per cent) of employers were worried the proposed reforms will increase their payroll provider costs, with more than a quarter (28 per cent ) expecting the reforms to require an additional five hours of staff time per month.

Modelling based on the findings suggested that this admin burden could cost £550m per year across the economy.

Whilst the ABI acknowledged that the government's plans could help tackle the growing number of small pension pots, it warned that they could also risk undermining the success of automatic enrolment (AE).

The report explained that, under AE, charges mainly take the form of a very small percentage of the value of the pension pot, which means that people with smaller pension pots benefit from lower charges than those with larger pots, with firms able to use cross-subsidisation to recoup the lower charges for small pots by charging more for larger pots.

Given this, the ABI warned that a member choice model could lead pension firms to focus their efforts on attracting savers with bigger pots out of workplace pension schemes, leaving smaller pension pots behind.

Indeed, the research showed that, based on analysis of international and UK markets, those with lower savings could end up with lower performing defaults, while also potentially being hit with increased charges as they would lose the cross-subsidies from larger pots.

The ABI warned that this could cause existing inequalities in pensions to deepen further, as it’s more likely to impact those who are younger, on lower incomes, women, and people from ethnic minority backgrounds.

What's more, the research showed that not only can member choice prove detrimental for lower-income savers, but it may not support good outcomes for savers as a whole.

According to the report, international evidence from Mexico showed that 40 per cent of consumers switched to schemes that had both lower returns and higher fees after a member choice model was introduced.

Member take-up rates could also pose a further challenge, as WPI Economics estimated that just 5-8 per cent of savers will exercise choice in the initial years of the reforms, based on evidence from other markets.

However, the research also raised concerns about the outcomes for savers who do decide to act, as over half (59 per cent) of employers said they would worry that their staff would make bad pensions decisions if they had to choose for themselves.

Likewise, 62 per cent of employers expressed concerns that the reforms would lead to their employees getting worse pension outcomes, compared to just 10 per cent who disagreed that there would be a negative impact.

Commenting on the findings, ABI director of long-term savings policy, Yvonne Braun, said: “Tackling the challenge of the rapidly growing number of small, inactive pension pots is vital so that it’s easier for people to keep track of their money.

“However, automatic enrolment through the workplace was primarily set up to help those who were not saving into a pension, many of whom were lower paid people, and we must not reverse its success. As this evidence shows, member choice would deliver few benefits, but risk throwing away the gains from auto-enrolment.

“Pensions dashboards will bring key improvements in data quality which could help to make more efficient, cheaper pension transfers a universal reality.

“It is important that this work is completed, and the impact understood, before any further reforms are added to the mix.”

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