Kate Smith, Head of Pensions at Aegon, comments on legal right to stick with existing pension in new ‘pot for life’: The Chancellor has announced that employees will be given the legal right to pay their pension contributions into an existing pension scheme rather than into their new employer’s pension scheme when changing jobs – the so-called ‘pot for life’.
Currently, under the highly successful automatic enrolment regime, it is the employer who selects the pension scheme provider for their employees, often with the help of an adviser.
The new ‘pot for life’ concept will give employees the ability to select their own pension provider and force their employer, as well as any future employers, to pay their employer and own employee contributions into this chosen pot.
The idea is that this will minimise the current issue of the proliferation of deferred small pension pots spread across numerous pension schemes or providers, with future pension contributions to be paid into a single scheme of the employee’s choice, regardless of however many employments they have during their working lifetime.
We recognise that 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, including use an existing provider, possibly with the help of an adviser.
However, there are risks of poorer retirement saver outcomes for millions of employees if employers feel they’re no longer at the centre of the pension provision for their employees.
Pension schemes can be used to as a means to attract and retain employees, as well as helping them to achieve greater financial security for life after work, helping them to retire. 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.
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.
Gail Izat, Managing Director for Workplace at Standard Life, part of Phoenix Group said: “While we wait to see the detail of the consultation, the idea of a pot for life would need careful thought given the practical considerations around implementation and the potential distraction from existing initiatives. A pot for life might be appealing from a simplicity perspective as the pension could follow people from job to job but there are bigger priorities facing savers and the pension industry that we would tackle first. These include ensuring contribution levels are adequate to provide people with a decent retirement income, identifying ways to extend advice and guidance to those struggling to make decisions and implementing the government’s value for money framework that will empower people to determine whether their pension offers good value.”
Mark Futcher, Partner and Head of DC at independent consultancy Barnett Waddingham, comments: “We now have a bit more clarity on the so-called ‘pot for life’, which will – according to the Chancellor –contribute towards the Government’s ambition to give the average new saver an extra £1,000 a year in retirement. The proposed consultation is in fact for a ‘stapling’ model, with new employees asking their employer to pay into their existing pot.
“Stapling can be done in a number of ways, but essentially it risks members keeping their first pension pot for the rest of their life. How that first pot is decided is up for debate – would any authorised master trust be allowed? Would there be increased regulatory requirements on value for members? Will employers have a responsibility to mirror the existing transfer rules to mitigate the risk of harm to their staff? Even once established, we risk an administrative nightmare without a robust central clearing house.
“As for improving people’s pot at retirement, it’s hard to see how this would help. Staying in the same pot means savers risk delays to investment decisions, poorer products, a lack of employer governance, and higher fees, as individual employees will always get a worse deal than large firms. What’s more, if we see more individual retail policies and less consolidation, the Mansion House proposals to use scheme funds to invest in the UK become even more difficult to implement.
“A consultation brings with it no certainty of change, but even if the consultation results in a positive outcome, making this work would easily take a decade. It has taken almost that long for the Government to fail to deliver a pensions dashboard – I won’t be waiting with bated breath for this reform to come to pass.”
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