One big pot? Would you prefer to keep saving into the same retirement scheme, no matter how many times you change employer
Many of us are acquiring an ever increasing number of pension pots as we change jobs, so having just one that we keep saving into throughout our working life is an attractive idea.
Auto enrolment has been a great success in getting people saving for old age, with only a minority choosing to opt out.
But a downside is the millions of pension pots being created. Inevitably some will be tiny, and many will get lost.
The typical comparison is with bank accounts.
We wouldn’t be happy if every new employer forced us to open yet another one, then keep on top of all the admin that involved, yet that is what we are expected to do with our pensions.
‘This is a peculiarly unsympathetic thing to do,’ says Tom McPhail, director of public affairs at research firm Lang Cat. ‘Savers having multiple pension pots creates a lose-lose-lose situation.
‘For savers, it erodes both their savings and their ability to engage with their pension. For the industry, it results in the proliferation of small pots that are costly to administer.
‘For the Government, it leads to a fragmented pensions market that struggles to offer value for money and to invest in growing the UK economy.’
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So having one pension pot that sticks with you – or is ‘stapled’ to you, in an unlovely bit of jargonese – is being debated as a way of curbing the number that are created in future.
To deal with all the pots that already exist, the Government is already looking at something called default consolidation.
That means if you lose track of small pots built up with old employers, these would eventually be placed with an approved provider, until you are hopefully reunited with them again.
A first glance, ‘pot for life’ sounds pretty simple, but it would involve a huge overhaul of the way pensions are run, particularly for employers.
Yet Australia already has a version of it up and running, so we know it is possible.
How would a ‘pot for life’ work?
It would effectively be ‘auto enrolment 2.0’, according to McPhail, who explored this idea more fully in a recent Lang Cat podcast.
Initially, employees would simply get the right to choose their own pension and to have contributions paid in by their current employer, he says.
‘In the longer term it could also mean modifying the auto-enrolment system. We would like to enhance auto-enrolment through “pot for life” becoming the default option for all workplace pension savers.’
Whenever you started a new job, your contributions would be sent to your existing ‘pot for life’, unless you chose otherwise.
If you didn’t already have a pot for life or say otherwise, your contributions would go instead to your employer’s default pension provider.
Pension saving: We are all building up an ever increasing number of pots whenever we change jobs
‘Any changes to the system in implementing this policy will have to be proportionate, fit for purpose from a legal perspective and not impose unnecessary burdens on employers, employees or the pensions industry,’ says McPhail.
Meanwhile, employers currently send pension contributions for all their staff to one provider, and won’t want to start making payments to a myriad of schemes.
To get around this there would probably have to be one clearing house, which would become the new destination for all pension contributions, and then be responsible for redistributing them.
And naturally, all ‘pot for life’ providers would have to be approved for suitability, and regulated to ensure people’s money was being looked after properly and they weren’t being overcharged.
Phil Brown, director of policy at pension scheme provider People’s Partnership, points out that introducing a ‘pot for life’ system would involve some fundamental changes beyond just workplace schemes.
‘There would need to be new governance structures introduced to non-workplace schemes and regulation would be needed to prevent “cream skimming” of wealthier customers,’ he says.
‘It would be essential that all providers operating in a “pot for life” market would need to be obliged to serve all customers.’
Martin Willis, a partner at pension consultant Barnett Waddingham, says: ‘The one thing that everyone agrees on is that small pots is an issue. It doesn’t help anyone. What no one agrees on is how to solve it.’
He says administration of a ‘pot for life’ system would be a challenge, as it’s embedded in the workplace – and, for example, pensions don’t all have account numbers and sort codes as bank accounts do – so you would need the right infrastructure to make it work.
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What are the benefits for savers?
A ‘pot for life’ would give savers the right to choose their own pension provider rather than be forced to accept the one selected for them by employers, says McPhail.
‘This provider-employer relationship means there is very little commercial pressure for the provider to look after employees as valued customers, beyond what is required by the regulator,’ he points out.
‘The dynamics of the pension system would be better aligned to suit the saver. Providers would be incentivised to look after savers knowing that if they did not give them a good service, they would risk losing them as customers.’
He believes putting savers in control will help them make the transition from the passive experience of being auto-enrolled into a pension to the active process of making decisions at retirement.
People could make better strategic decisions about how to invest and eventually to draw on one £100,000 pot than 10 £10,000 pots, he reckons.
Tom Selby, head of retirement policy at financial services firm AJ Bell, says allowing people to choose their own pension scheme for automatic enrolment could give them a greater sense of ownership over their pension, and encourage more to increase their contributions voluntarily.
‘It could also enable people to benefit from greater levels of choice and flexibility if they choose to save through a Sipp, and add extra competition to the auto-enrolment space.
‘In addition, enabling member choice could help reduce the growth in “lost” retirement pots, as savers would be able to direct their contributions to their chosen provider when they switch jobs.’
What are the drawbacks for savers (and their employers)?
Changing how employers make pension contributions would be a major administrative endeavour even if there was a new clearing house system, according to industry experts.
‘It’s very important to remember that pensions are not like bank accounts, as bank accounts are basically interchangeable and pensions aren’t,’ says Phil Brown of People’s Partnership.
Workplace pension providers don’t all offer the same value for money, even though there is a 75 per cent charge cap if you stick with your employer’s default fund. Meanwhile, pension providers operating independently of employers do not have to cap charges.
‘In a world where you would allow people to send their pension money to any kind of scheme, the question becomes, how would you make sure that the pensions saver makes an informed choice that is in their long-term interest?’ says Brown.
‘It’s also critical, as with banking, to make sure that products are all of a reasonable standard or have similar characteristics, such as the way they charge.’
He adds: ‘The administration of tax relief, which forms part of an individual’s automatic enrolment contribution, would also need looking at, as there is more than one way to collect tax relief at the moment.’
Selby says: ‘Auto-enrolment rules apply to firms of all sizes, from huge corporations to corner shops. That is already a sizeable undertaking where a firm has to connect to a single pension scheme. Under this proposal, firms would need to connect to multiple schemes.’
Creating a clearing house could potentially come at a substantial cost, and ‘pot for life’ advocates need to set out what this might be, and how to avoid burdening employers with the bill, he points out
Willis says: ‘One of the dangers of the “pot for life” is who is to say it’s a good pot? Who is to say the personal pension you choose in your 20s is the one that gives you all the functionality you need when you are 65 to 70.
‘Will it encourage pension schemes to innovate. Are you getting the most innovative products.’
He also points that employers keep their pension schemes under review, and good employers can add something valuable to what is offered to their staff, so it would be a shame if this support was lost.
What are the chances of you getting a ‘pot for life’ any time soon?
The number of tiny, abandoned and lost small pots is continuing to grow, and over time will become a worse headache for savers and a more costly administrative problem for the pensions industry.
Should you merge your pensions?
It can make retirement investing easier (and potentially cheaper)… but beware losing valuable perks by combining old pensions.
Efforts to get people to merge old pots, and to introduce ‘default consolidation’ for those who don’t bother, will help slow down this growth, but it seems likely a more comprehensive solution will eventually be sought.
McPhail says of future prospects for ‘pot for life’ pensions: ‘There is strong support across the industry for this development to auto-enrolment 2.0.
‘There is also concern and resistance from those who either don’t want to jeopardise the success of auto-enrolment or who simply don’t want any threats to their existing business model.’
He believes there is a window of opportunity to pass legislation this side of the General Election.
But it could well take a lot longer to thrash out the details, as anyone who has spent years watching the finance industry and Government try to set up pension dashboards will be aware.
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