- The pension pots-for-life plan takes the onus off of employees to keep track of their pensions as they move jobs.
- Clarification is needed on how employers would manage the process of putting employees’ contributions into many different pension pots.
- Pots for life may not completely end the employer’s role in choosing a pension provider, especially if a large scheme offers favourable terms and investment strategy.
The pension pots-for-life plan, announced in 2023’s Autumn Statement by Chancellor of the Exchequer Jeremy Hunt, would turn the current pensions system on its head. Instead of an employee building up a new pension pot every time they change employer, their pot would follow them through their working life. It is important to note that the government’s proposals are still at consultation stage. The details, and even whether pots for life will go ahead, are still unknown.
If the government does pursue the policy, it would be a fundamental rewrite of the pensions system, with major implications for employers, employees and the wider pensions industry.
Good news for employees
Pots for life is great news for employees, taking the onus off them to keep track of their pensions as they move from job to job.
Philip Smith, defined contribution (DC) director at master trust TPT Retirement Solutions, explains: “It’s something that [employees] will have from the day [they] start work. [They will] have an interest in it, and it’ll follow [them] throughout [their] working life. It should help to reduce the number of pots and get people more engaged and buying into what the purpose of their pension is and give it more visibility. So overall, our view is that the concept is a good one. But it’s all in the execution.”
The change would shift responsibility onto employees not to ‘set and forget’ their pension scheme when they start working, but instead to keep it under review. Would this lead to a revolution in employee engagement with their pensions? Opinions differ. “I suspect what will happen is that people stay with the [scheme] they get auto-enrolled into the first time,” says Smith.
Given all we have seen in terms of limited consumer engagement with pensions, will people break the habit of a lifetime and engage with their scheme investments? Possibly not. But they could surprise us.
Paul Leandro, partner at Barnett Waddingham, is optimistic. Having spent some time in Australia, where employees choose their pension scheme, which is known as a superannuation fund, Leandro has seen it empower people. “I think I think it improves engagement and ownership of pensions, and it gets rid of some of the barriers to engagement,” he says. “Someone’s superannuation fund is at the forefront of their mind. There is a real sense of ownership and a cognition that they will need to make retirement decisions.”
That said, were pots for life to go ahead, the default would still have a really important role to play, adds Leandro. In Australia, hospitality scheme Hostplus is one of the largest superannuation funds; in part because so many people’s first jobs are in hospitality and they do not switch schemes when they move jobs.
Clarification needed
For pots for life to be successful, the devil is in the detail. It is unclear how employers would manage the process of putting employees’ contributions into many different pension pots. Rumours abound that a government or HM Revenue and Customs (HMRC)-run clearing house could be created, in a bid to emulate the Australian superannuation model, which uses a central clearing house to process employees’ contributions.
“I can’t see how forcing the clearing on employers would work,” says Smith. “Imagine a large organisation, with say, 25,000 employees. How [is it] going to manage 25,000 individual contributions? [It] can’t do it without a clearing house of some description.”
More broadly, for employers that take a paternalistic approach to paying pensions, pots for life would be a major change and a surrendering of control. Alyshia Harrington-Clark, head of DC, master trusts and lifetime savings at the Pensions and Lifetime Savings Association (PLSA) explains: “Employers pick the plumbing on [their] house. Now someone else is going to pick the plumbing on [their] house, and [they] have to just deal with that.”
There are concerns that this could create a shift in attitudes for some employers. Hannah English, head of consultancy at Hymans Robertson’s DC consulting services says: “If [pensions] become a bit more transactional and the money goes to the clearing house and the clearing house sends it out, it all feels diluted. There is a risk that, over time, the employer may feel less engaged.
“Could this mean that employers that currently pay above and beyond auto-enrolment minimum contribution rates start to see this as less of a part of their offering, and potentially reduce contributions? That is one of our concerns.”
The challenge for employers is how do they make their pension offering appear valuable if they are having to ensure that pension payments go to multiple providers? adds English. “They may not be able to negotiate attractive terms any more,” she says. “Their pension should still form a big part of their reward and benefit offering. How do you still make it appreciated and valued by employees? That is the challenge for employers.”
It is not all bad news. There could be a silver lining as employers focus less on their provider as a differentiator. With an ageing workforce in the UK, reward teams’ attention could turn to improving contribution rates, says Leandro.
“With ageing workforces, employers are cognisant of the fact that they will need to recruit and retain people over 50, where pension benefits are a key focus,” he explains. “Employers [that] have paternalism around benefits generally, including pensions, will be looking to have the right level of contributions.”
Plus, pots for life may not completely end the employer’s role in choosing a pension provider. The call for evidence anticipates the need for exemptions where the employer provides a better pension, says English. “If a big scheme, which is really paternal, has set up really good terms and a really good investment strategy, [it] would be really disappointed to lose that offering.”
Burden on employers
The admin burden on employers could get ugly. It is unclear how the government would narrow down the universe of pension schemes which would be eligible to receive contributions from employees.
Harrington-Clark gives one example of potential complexity. “Let’s say six months after they choose one scheme, the employee decides, ‘Oh, no, actually, I don’t like this scheme anymore. I like this other scheme instead. The employer would have to do the whole process again. [It would] have to go right back to the beginning. Start again, check everything, redo the plumbing, et cetera.”
Truly, when it comes to pots for life, the devil will be in the detail. If the government does not get the model right, it could create an admin nightmare for employers. However, done well, it could improve engagement among consumers; the Holy Grail which UK employers and the pensions industry alike have always struggled to achieve.