The SPP welcomes DWP’s efforts towards developing a sustainable long-term strategy for the UK’s pension provision. However, SPP has significant concerns about DWP’s proposed lifetime provider model. Despite its appealing simplicity, the SPP doubts whether this model would be suitable for UK pension provision. There is a real likelihood of employer disengagement, quality dropping and adverse selection by providers to the detriment of lower-income savers. The significant system changes and increased payroll complexity that would also be needed are extra downsides.
Many strategic initiatives are currently under development or have recently been rolled out, including those aimed at addressing the issues of small pots, further consolidation proposals (e.g., VFM framework), pensions dashboards, increased pension investment in “productive finance”, and the introduction of CDC. All these initiatives need enough time to succeed and deliver the Government’s aims, before moving forward into something radically new.
The proposed lifetime provider model places crucial decisions about pension savings on the shoulders of savers, but a significant proportion of savers will never have the tools and knowledge needed to make informed choices. The DWP must acknowledge that a key reason for providing dedicated support during the decumulation phase is because of the widescale recognition that many cannot or do not want to take these really important financial decisions, with a significant proportion ultimately making sub-optimal choices.
Additionally, DWP should take a more extensive and critical review of the international experience of the lifetime provider model. International experience exhibits clear flaws, such as stifling innovation and competition, as well as promoting rigid contributions and minimum service standards. Even in the case of Australia, DWP should note that a 35-year head start and a very different approach to charges make that model difficult to compare to the UK’s reality.
Giannis Waymouth, Chair of SPP Defined Contribution Committee: “Although a lifetime provider model sounds like it could address with simplicity some of the ills affecting current DC pension, in reality, it has the potential to create more problems than it solves and to drive down the quality of pension provision. Severing the employer link and putting all the decision-making burden on savers could lead to sub-optimal decisions, as well as reducing market innovation and competition. DWP should give time to recent policy developments and initiatives in the DC space to bed down before moving forward into uncharted territory, in particular when potential harms are higher than the expected benefits”
|
