Lifetime pension provider model risks undermining AE, says ABI

2 April 2024

The UK government’s proposal to introduce a lifetime provider model for pensions risks undermining the success of automatic enrolment, the Association of British Insurers has warned. 

To tackle the growing number of small pension pots and increase engagement, the government has suggested introducing lifetime provider models through two methods: member choice and pot for life.

Member choice would give employees the right to ask their employer to pay their contributions into a pension pot of their choice. Pot for life would mean employees stay in the first pension scheme that they started saving into at the beginning of their career, unless they proactively opt to move.

The ABI said the proposals could “fundamentally change” the role of employers and could have a negative impact on outcomes for savers.

To better understand the potential impact of the government’s proposals, the ABI polled employers on how they would respond to the reforms.

Under automatic enrolment, charges normally take the form of a very small percentage of the value of the pension pot which means that people with smaller pension pots benefit from lower charges. Firms recoup the lower charges for small pots by charging more for larger pots.

However, under the proposed member choice, people would be encouraged to switch providers and firms, creating an individualised pricing model. With this model, pension firms are likely to want to attract savers with bigger pots out of workplace pension schemes, leaving smaller pension pots behind, the ABI said. As a result, those with lower savings could end up with lower performing defaults, while also potentially being hit with increased charges as they would lose the cross-subsidies from larger pots.

The industry body also said that employers’ role in selecting the appropriate pension for their employees could change, with individuals taking more control of their pension pot. Around two thirds (65%) of employers said it would be more difficult to assess the quality and value of a pension scheme for employees under the proposed reforms and 57% said they would take less interest in the quality of the scheme that they would choose for the employees who remain with their workplace provider.

Furthermore, 59% of employers said they would worry that their staff would make bad pension decisions if they had to choose for themselves and 62% of employers expressed concern that the reforms would lead to their employees getting worse pension outcomes.

Yvonne Braun, director of long-term savings policy at the ABI, said: “Tackling the challenge of the rapidly growing number of small, inactive pension pots is vital so that it’s easier for people to keep track of their money. However, automatic enrolment through the workplace was primarily set up to help those who were not saving into a pension, many of whom were lower paid people, and we must not reverse its success. As this evidence shows, member choice would deliver few benefits, but risk throwing away the gains from auto-enrolment.

“Pensions dashboards will bring key improvements in data quality which could help to make more efficient, cheaper pension transfers a universal reality. It is important that this work is completed, and the impact understood, before any further reforms are added to the mix.”

In response to the findings from the ABI, Fidelity International agreed that the lifetime provider model would radically change the UK pensions market and unwind much of the progress made by automatic enrolment, which has revolutionised workplace saving in recent years.

James Carter, head of platform product policy at Fidelity International, said: “While we welcome the government actively engaging on the topic of pensions and its efforts to create more secure financial futures for the population, we echo the ABI’s concerns about the proposals being put forward. We question whether the reforms would enable better outcomes for typical members or deliver the policy ambitions put forward in the call for evidence.”

Carter said that the proposals have the potential to undermine the role of the employer in supporting engagement in pensions and the achievements of automatic enrolment.

He added: “‘Pot for life’ proposals could be harmful to those whom automatic enrolment was designed to benefit. We need to stay focused on the successful delivery of other initiatives, such as the development of pensions dashboards, already in flight, and turn soonest attention to increasing the levels of pension contributions being made.”

Fidelity’s own research found that 65% of employees agree that they like the idea of giving savers the opportunity to choose but would most likely remain with the pension provided by their employer. Half said they would feel concerned about knowing the responsibility for choosing their workplace pension rests with them and three quarters (75%) said that while they like the idea of being able to choose their workplace pension provider, they would want access to advice/guidance of some kind to help inform their decision.

In addition, just over half (51%) also worry that it could widen the pension gap between those who are financially confident and those who are not.

Professional Paraplanner