Kate Smith, Head of Pensions at Aegon, said: “The proposed default lifetime provider model is a unnecessary distraction from the real and more immediate need to improve retirement income adequacy for all pension savers. There is no mention of this, or of higher pension contributions in the Call for Evidence.
“Improving retirement income adequacy needs to be the overarching objective of any pension policy. The relatively low level of pension contributions paid by the majority is a political time bomb waiting to go off, as employees are lulled into a false sense of security that they have saved enough.
“One of the first steps which will make the biggest improvements to member retirement outcomes is the implementation of the 2017 auto-enrolment reforms. We had expected to see the government’s consultation on implementing these reforms by now, and are concerned that the Call for Evidence has delayed this. After the change to base contributions on earnings from the first £, the next step is to start work on increasing the auto-enrolment contribution rate to 12% of earnings, with at least half paid by employers.
“For over 10 years, employers have been at the heart of pensions, and are largely responsible for the success of auto-enrolment. We recognise that not all employers are the same, with many paying more than the auto-enrolment minimum contribution and providing support in the workplace, including targeted pension campaigns to improve member engagement.
“If employers just become responsible for paying contributions to a lifetime provider, with none of the benefits of running their own scheme, such as attracting and retaining staff and improved financial wellbeing, this risks them disengaging from pensions and levelling down to the regulatory minimum. At a time when contributions need to increase, this would absolutely not be in the best interests of savers.
“Many policy and regulatory issues are already in full flow, which, together, have the potential to address the future proliferation of pension pots, large and small, as well as pensions engagement. These include the scheme consolidation agenda, value for money framework, pension dashboards, default small pot consolidators, the FCA’s proposed targeted support guidance model, and the pension industry’s digitalisation of pensions.
“Rather than developing an entirely new and vastly different pension framework at an immense cost, which could be incredibly disruptive for savers, employers and the pension industry, we believe the Government should wait and see how the various initiatives bed in and how the pension market reacts to support savers. Due to the combined impact of these initiatives, the pension industry will look very different in 10 years’ time, with fewer but larger pension schemes where individuals will be much more likely to be saving in the same scheme for longer, benefiting from greater targeted financial support and pension dashboards developed to allow transactions such as member-led consolidation.“
Paul Waters, Head of DC Markets, Hymans Robertson, said: “The lifetime provider model - so-called ‘pot for life’ - does not tackle the savings adequacy challenge for DC savers. The government’s proposal risks making the situation worse by placing more responsibility on savers and away from employers, without addressing how overall savings rates will be increased. Many DC scheme members lack the financial education and confidence to choose their own pension provider. The pot for life model risks members making poor decisions based on the cheapest or best marketed solutions, rather than those offering the best value for money.
“The large amount of time, resources, and infrastructure that creating a pot for life model would require risks distracting from existing priorities in DC pensions, which should be tackled first. Advancing small pot solutions, the government’s Value for Money framework, and the roll-out of the Pensions Dashboard should be completed, and would help create a more suitable environment for a lifetime pension model in due course.
“What a pot for life does do is leverage the power of inertia such that members build up savings in one place, making it more likely that members will engage with and understand their pension.”
David Brooks, Head of Policy of Broadstone, commented: “The sudden introduction of the lifetime provider model ahead of the Autumn Statement was a surprising change in policy. The risk is that these changes undermine some of the recent progress, confuse members and create additional, expensive burdens on stakeholders.
“Government should redouble its efforts to get dashboards live, make DC decumulation pathways the norm and grow contributions - that’s the way to build security and better outcomes for members.”
Gail Izat, Managing Director for Workplace at Standard Life, part of Phoenix Group said: “The idea of a pot for life system is an intriguing one that could simplify pensions for many savers. However, realistically it’s a long-term initiative that will require a great deal of groundwork before it is made a reality. Australia provides the most clear template for this model but even there its introduction came from a less complex market backdrop and was the culmination of many years of reforms that consolidated the pensions system, created a robust data sharing framework and established high quality clearing houses. The UK is already on the journey to creating this infrastructure through other initiatives, like the pensions dashboard and small pots work but they need to be completed before a pot for life system becomes viable. There are other changes we would like to see prioritised including a greater focus on savings adequacy and the extension of auto-enrolment and an increase in contribution rates in the shorter term”.
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