I am increasingly sympathetic to the government's strategic agenda on pensions, which can be summed up as: fewer, bigger, better-run schemes investing more in UK economic growth.
This is the right strategy for a whole host of reasons, including the fact it is in everyone's interests to stimulate more economic growth, and the potential for pension schemes to play a pivotal role in that ambition. There's also the fact the UK pension system is fragmented and could be more efficient in how it helps people save for retirement.
Why Would Anyone Oppose This?
On the specific policy of a lifetime pension provider, or Pot For Life, there are compelling reasons why it makes sense to evolve auto-enrolment and build on its success. Auto-enrolment is built on defaults and inertia, but this has significant drawbacks: the current system is creating millions of dormant pension pots; every time someone changes jobs they are forced to take out a new pension. Given the widespread recognition we need to encourage people to engage more with their retirement saving, I can't think of a more counter-productive approach. It is peculiarly unsympathetic.
So individuals end up with multiple pension pots, which leads to disengagement, poor decision-making, and confusion. Meanwhile the pensions industry wastes vast sums of customer money administering small pots from which they can't recoup their costs.
No one wins from this. In theory you can partially solve this problem by transferring an old pension to a new employer's scheme every time you change jobs. But this is still massively inefficient and doesn't help with the engagement challenge. The only way you can fix all these problems caused by auto-enrolment is to move to a system where individuals carry their pension from one job to the next, getting each successive employer to pay into it for them. This is such an obvious development it is surprising anyone would oppose it.
Concerns Assuaged
That said, there are four legitimate concerns about the lifetime provider solution.
Firstly, that it will be disruptive for employers, who will be forced to deal with multiple pension providers instead of just one. The solution to this is to introduce a clearing house to act as a middle-man. This single counter-party for employers would mean they could make one payment to the clearing house every month, with the clearing house then sending on employees' contributions to chosen pension providers.
Secondly, that it would undermine the cross-subsidies in the pension system; that pension providers would cherry-pick the lucrative, high-paid employees and offer them good value pensions, leaving the lower-paid to languish in higher-charging schemes. This isn't borne out by the reality of the existing pension system, though, where charges are already well below the 0.75% charge cap and mass-market providers like Nest still manage to give all their customers a competitive deal on charges.
Thirdly, there are concerns lifetime providers would offer poorer pensions than the current auto-enrolment providers. However, it is already clear from the Department For Work & Pensions that lifetime providers will be subject to the same regulatory controls that exist today for workplace schemes.
A Logical Next Step
Finally, some are concerned this move to a relationship focused on the member and the pension provider would undermine the good work employers do in communicating and engaging on pensions in the workplace. This is a failure of imagination. Most employers don't do this today. For the minority of employers who do it and want to continue to give their employees the benefit of workplace financial engagement, there is nothing to stop them contracting with employee benefit providers or financial coaches who can provide a similar service.
The lifetime provider development offers the best of both worlds: effective defaults where they are needed and individual choice to promote persona agency and engagement. It is the logical next step in the UK’s pension system.
Tom McPhail is director of public affairs at The Lang Cat
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