A ‘pot for life’: Workers would get the right to choose their own pension and to have contributions paid in by their current employer
More than half of pension savers would like a ‘pot for life’ but many are nervous about making poor choices, new research reveals.
When asked what was most likely to influence their selection of a lifetime pension scheme, the most popular response was that they would follow the recommendation of a ‘money expert’.
An endorsement by an expert they trust would be more persuasive than investment performance, trusted brands, financial advisers, low fees or family and friends, according to the survey by pension consultant Barnett Waddingham.
The Government is currently looking into whether to allow savers to open a pension that all current and future employers can pay into throughout their working lives.
It has held a consultation and confirmed in the March Budget that it is exploring the idea – which divides pension experts.
Many welcome the idea and liken it to having a bank account. They say it could curb the vast number of pensions being created every time people start a new job.
But although it has been dubbed ‘auto enrolment 2.0’, others say it risks undermining the successful initiative which has seen millions of people signed up for pensions by their employers unless they actively opt out.
> How would a ‘pot for life’ work? Find out below
Critics suggest letting people choose their own ‘pot for life’ could sever the connection with employers, who have more clout to pick a decent pension scheme and negotiate cheaper charges than individuals.
They also fear big pension providers would advertise and compete to attract the savers with the biggest pots, leaving those with small pensions or less financial knowledge in worse-performing schemes with higher fees.
However, 53 per cent of savers think it would be a positive change to the pension system, and 54 per cent said it would make them more engaged with their funds, according to the new poll by Barnett Waddingham.
Some 38 per cent felt it would make them more confident about retirement, but 49 per cent said they were worried about making bad decisions over their choice of lifetime pension scheme. Pots for life were opposed by 15 per cent of those surveyed.
Barnett polled 2,000 people with ‘defined contribution’ pensions, where individuals and employers build a pot that is invested for retirement.
These have replaced safer and more generous final salary or ‘defined benefit’ pensions, where employers bear the investment risk, outside of the public sector.
Pension industry body the Association of British Insurers says that ‘lifetime provider’ models might help to tackle the growing number of small pension pots, but they risk undermining the success of automatic enrolment.
It commissioned a report from consultancy firm WPI Economics into the potential impact of ‘pot for life’ proposals, which included a survey of more than 1,000 employers. Here are its findings.
– Under automatic enrolment, savers currently pay low percentage charges (capped at 0.75 per cent if you stay in an employer scheme’s default fund) so people with smaller pension pots benefit from lower charges than those with larger pots.
‘Firms recoup the lower charges for small pots by charging more for larger pots – known as cross-subsidisation,’ says the WPI report.
‘However, under member choice people would be encouraged to switch providers and firms – creating a retail or individualised pricing model, similar to banks.’
Mark Futcher of Barnett Waddingham: Issues of apathy, low financial literacy, and chronically low pension saving won’t be fixed by a pot for life
– With a ‘pot for life’ system, pension firms are likely to seek to attract savers with bigger pots out of workplace schemes, leaving smaller pension pots behind.
‘Based on analysis of international and UK markets, 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.
‘This could cause existing inequalities in pensions to deepen further, as it’s more likely to impact those who are younger, on lower incomes, women, and people from ethnic minority backgrounds.’
– Evidence from Mexico shows 40 per cent of savers switched to schemes which had both lower returns and higher fees when a ‘member choice’ model was introduced.
– Employers play a significant role in defined contribution pension saving by selecting an appropriate scheme that meets their employees’ needs.
‘The onus would shift from employers securing the best deal for their employees, to individuals taking more control of their pension pot,’ says the report.
In WPI’s survey of employers, 57 per cent said they would take less interest in the quality of the scheme they would choose for staff who stuck with their workplace provider, and 59 per cent said they would worry that staff would make bad pension decisions if they had to choose for themselves.
Some 62 per cent of employers were concerned staff would get worse pension outcomes compared to 10 per cent who disagreed there would be a negative impact.
What are the pros and cons of a ‘pot for life’ – and when might we get them?
Supporters say savers would be able to choose their own pension providers, which would be incentivised to look after them as individuals rather than employers, and beyond what is required by a regulator.
They believe putting savers in control of their own funds would encourage them to saver harder, and also help the transition to retirement when many people move to drawdown funds and manage their own investments.
Competition and choice of schemes could improve, and meanwhile the hassle of starting new pots whenever you move jobs – and potentially losing track of them – would be lessened.
Critics say changing how employers make pension contributions would be a major administrative endeavour even if there was a new clearing house system.
They also point out that bank accounts are far more interchangeable than pensions, which don’t all offer the same product and value for money, and can be very different in terms of fees, performance and contract conditions.
Meanwhile, pension providers operating independently of employers do not have to cap charges, as workplace schemes do at 0.75 per cent if you stay in their ‘default’ fund.
Opponents express concern that individuals will not have the knowledge to choose a pension scheme meant to last them for life, or have the same power as employers to get a good deal. Also, a pension scheme that suits someone early in life might not work as well when they hit middle age, or get near retirement.
The Government flagged the plan at the Autumn statement last year, and the subsequent consultation ended in January. Chancellor Jeremy Hunt indicated at the Budget in March that he remained committed to exploring the idea.
It might not have time to do more ahead of the next election, and we will learn more if ‘pots for life’ appear in the party manifestos.
> Should you merge your pension pots? Read a This is Money guide
What do pension experts say?
Mark Futcher, partner and head of DC pensions at Barnett Waddingham, says of his firm’s survey results: ‘British savers have clearly been wooed by a sexy-sounding new pensions policy that has built up their hopes for a better future for retirement.
‘But issues of apathy, low financial literacy, and chronically low pension saving won’t be fixed by a pot for life.
Yvonne Braun of the ABI: Member choice would deliver few benefits, but risk throwing away the gains from auto-enrolment
‘What’s worse, we know that Australian SuperFunds on the other side of the world tend to splash the cash on sponsorships of sports teams, and advertising campaigns which would clearly win over savers looking for experts and brand trust.
‘Yet, this spend comes at an opportunity cost of investing in member outcomes, and we risk a pensions system that is fighting for commercials, not consumers.’
Futcher says there are some very big pension problems the Government must fix before a pot for life will work, such as increasing auto-enrolment levels, auto-escalating contributions when people get pay rises, and lowering the contribution age threshold.
Yvonne Braun, director of long-term savings policy at the ABI, says: ‘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.’
She says of the ABI-commissioned report on how pots for life would work in practice: ‘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.’
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