The Government’s ‘pot for life’ has been slammed by the pensions industry as a distraction from people’s real retirement needs.
As the Department for Work and Pensions’ Call for Evidence ‘Looking to the future: greater member security and rebalancing risk’ closes, experts claim that the default lifetime provider model has taken priority over more urgent pension concerns.
Kate Smith, head of pensions at Aegon, said the government must focus on improving retirement income adequacy, warning that the low level of pension contributions is a “political time bomb” waiting to go off.
Smith said: “The proposed default lifetime provider model is an 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.”
Aegon has called upon the government to look at the implementation of the 2017 auto-enrolment reforms, which it argues may have been delayed by the Call for Evidence. After the change to base contributions from the first pound, Aegon said the next step is to work on increasing the auto-enrolment contribution to 12% of earnings, with at least half paid by employers.
However, it warned that 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, it risks leaving them feeling disengaged from pensions and levelling down to the regulatory minimum.
Smith said: “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. 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.”
Royal London expressed similar concern about the lifetime provider model. Research by the pensions and investment mutual found that 63% of advisers believe it will make communication more difficult and reduce employer interest in pensions, which will worsen outcomes for the majority of employees. An even greater number (67%) also believe the impact of sending contributions to numerous providers will be problematic. Only just over one in 10 (13%) think it is a good idea that existing small pots will be automatically allocated to one of a smaller number of consolidator schemes.
Jamie Jenkins, director of policy at Royal London, said: “We have seen lots of debate about how the lifetime provider model might work, and our research provides a snapshot of what advisers think, considering both corporate and individual clients.
“Arguably, the most pressing issue is how we address the shortfall of pension provision for the younger generations starting out on their career, rather than rethinking the whole approach to retirement saving at this stage. We should build on the success of automatic enrolment rather than dismantle it.”
Gail Izat, managing director for workplace at Standard Life, said that while the idea of a pot for life is an “intriguing one”, in reality it will require a great deal of groundwork.
Izat added: “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.”
