Pensions experts have raised serious concern about the government’s new plans for a “pot for life”.
Consultancy Lane Clark & Peacock LLP (LCP) is one of a growing number of firms to express worries on the radical proposals to consolidate multiple smaller pension pots that have been spawned by auto-enrolment.
As the Department for Work & Pensions’ consultation into the reforms draws to a close this week, LCP argued that the plans represent a major distraction from much more urgent initiatives such as taking forward the recent legislation on increasing auto-enrolment pension contributions.
It argued there are better ways of tackling the proliferation of small pension pots, which do not involve such fundamental disruption to the existing system and do not risk undermining existing high quality provision for low and middle earners.
Laura Myers, partner and head of defined contribution at LCP, said: “The top priority for tackling the under-saving crisis is getting more money going into workplace pensions.
“Yet implementation of legislation that would do just that is currently stalled whilst the government apparently has capacity to do work on a complete restructuring of the whole architecture of automatic enrolment.
“There is already a huge amount of change and reform in the pipeline, taking up the time and money of employers, providers and trustees.
“These various reforms need to see the light of day and then be given time to bed in and their impact to be assessed before moving on to further change of questionable benefit and considerable cost to members”.
Instead, LCP identified a ‘shopping list’ of concerns that it wants the government to address. This included highlighting the risk of adverse outcomes for those who do not exercise choice, especially if more lucrative higher earners leave a scheme, thereby making the remaining scheme less economic for providers.
It also queried how individual savers will be able to evaluate the different pensions on offer to them and whether they will be expected to analyse complex reports.
The consultancy also worries that savers could instead be swayed by the best marketing or incentive offers and as a result possibly opt for inferior options.
The wrong consultation at the wrong time
The Association of Consulting Actuaries (ACA) also raised serious doubts about both the timing and desirability of the ‘pot for life’ proposals. The ACA expressed concerns about the new infrastructure required across multiple areas such as administration, technology, regulation, protections, and safeguards for members.
It added that a move away from employer sponsored arrangements will reduce employers’ engagement with retirement savings and raised fears around how the regulators will ensure that lack of competition and potentially heavy marketing to individuals does not result in poorer outcomes for members.
Steven Taylor, chair of the ACA, said: “Many savers find pensions complex and difficult to engage with. To move to an approach whereby individuals are making judgements about the merits of different pension products (or perhaps “default” to an existing scheme and fail to consider a new employer’s scheme, through lack of engagement) is a significant ask, and will demand new safeguards and controls to avoid worsening member outcomes at retirement.
“There are a few alternative ideas and products that could deliver the laudable aims of this initiative, with lower risk.”
Tim Box urged the government to build evidence that highlights how the plans will improve retirement outcomes for the majority of pensioners.
Box, who is chair of the Pensions Management Institute’s (PMI) policy and public affairs committee, added: “We are concerned that this is the wrong consultation at the wrong time. While we generally support consideration of changes to the UK pension system that improve member outcomes and the overall efficiency and functioning of the system, we believe that any changes as fundamental as these need to be properly thought through, based on evidence and the development of consensus.
“The government needs to explain more fully what it is trying to achieve and provide more detail about how it intends to do this. There may be some merit in considering how a lifetime provider system could help connect people with their pensions and provide better outcomes but there are many policy initiatives already in various stages of development which could also achieve these goals. We urge the government to spend the time building the evidence base that lifetime providers will improve retirement outcomes for the majority of members and gain consensus about this before jumping into wholesale change of the pensions system.”
Choose for me
All this comes as the Pensions and Lifetime Savings Association’s (PLSA) latest research found that more than two thirds of employees want their employer to choose their workplace pension provider.
The research found that when given the choice, 69% of respondents expressed a preference for their employer to choose their workplace pension provider, as opposed to just 31% who would opt to make the decision themselves. This preference was notably higher among women, with 75% leaning towards employer selection, compared to 63% of men. A generational divide was also apparent, as 66% of savers aged 18 to 54 favoured employer selection, while a substantial 85% of those aged 55 and above shared the same sentiment.
Joe Dabrowski, deputy director of policy at the PLSA, said: “This research highlights the importance savers place on their workplace pension scheme and the support their employer provides in choosing and managing high quality provision that will help deliver their retirement needs.
“As we can see, not all savers are the same, from generational to gender disparities there are clear differences in knowledge, understanding and confidence.
“While the sector examines the concept of a lifetime provider, it is important that we carefully consider the implications the model may have on good saver outcomes, especially given long-established concerns about general financial literacy, as well as the average saver’s engagement and understanding of pensions.”