The Government’s proposed ‘pot for life’ solution for workers accruing multiple pension pots during their careers has received short shrift from the industry, with commentators concerned it increases risk and could damage employer engagement in pension provision.
In his Autumn Statement the Chancellor 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, termed the ‘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.
However, industry leaders have questioned this approach, fearful that it will damage employer engagement with workforce pensions and result in poorer outcomes for consumers.
Kate Smith, Head of Pensions at Aegon said while recognising that the ‘pot for life’ may appeal to 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, “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.
She said: “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.”
This concern was mirrored by James Carter, Head of Platform Product Policy, Fidelity International. He said: “A ‘pot for life’ model would radically change the UK pensions market and risk removing the benefits of workplace pensions and the regulatory and governance framework which protects members of workplace pension schemes.
“We question the extent to which this would improve member outcomes, also because it would dis-intermediate employers from their role in supporting the financial wellbeing of employees through the workplace.
“We strongly agree with the need to address the proliferation of multiple small pots held by UK savers. A key part of tackling this challenge lies with the development of the pensions dashboard, and providing consumers with multiple pots a single, consolidated view of their pension wealth. We have also been deeply involved in considering possible solutions as part of the Small Pots Cross-Industry Co-ordination Group.”
Further discussion and the opportunity to have a complete and robust debate was necessary, he said.
Jon Greer, head of retirement policy at Quilter, said that although the proposal sounded positive on the surface and useful for those members who are keen to take ownership, “it has flaws”.
“The ‘pot for life’ would likely take a long time to gain traction, not least because the majority of workplace pension savers are largely disengaged. They simply trust that their employer gets on with setting up their pension through the auto enrolment process and they therefore may not be keen to engage with a system that requires them to play a more active role.
“The success of auto-enrolment has been built on inertia. While new data shows 88% of eligible employees participated in a workplace pension in 2022, there is scant evidence that people will engage to the point of making an active choice to stay in a scheme or choose a particular scheme in the first instance. The engagement required may have no basis in reality unless the pot moving with a scheme member is the default, and this would require a total overhaul of the current system which doesn’t appear to be part of the plans.”
Andrew King, Retirement Planning Specialist at wealth management firm Evelyn Partners, said the scheme “flies in the face of the well-established auto-enrolment system” and pointed out that employees can currently transfer and amalgamate old pensions pots, often at zero cost, either into their current employers scheme or into a personal arrangement.
The new proposal, he added, would mean employers could be paying pension contributions to many different pension providers “via a spiders’ web of direct debts” adding, “it’s also quite possible that it would open the door to scammers as employee funds would be leaving the ambit of a single, approved employer-arranged scheme.
“Unless some of these potential pitfalls have been considered, such a bombshell into the auto-enrolment system could be a lot more problematic than, for instance, making it easier for employees to track and roll up their pots into their new employer’s scheme or a personal pension.”
