Among the 110 fiscal measures announced in the latest Autumn Statement was a call for evidence on a lifetime provider model to simplify the pensions market.* But will this actually simplify pensions for savers?
The new scheme would allow individuals to move towards having one pension ‘pot for life’, and on a potential expanded role for collective defined contribution (CDC) schemes in future. It would also create a ‘public consolidator’ for defined benefit schemes run by the Pension Protection Fund.
The government will also introduce the multiple default consolidator model to enable a small number of authorised schemes to act as a consolidator for eligible pension pots under £1,000.
So, what are the potential positives and negatives of this new proposal for pension savers?
The positives of a pension ‘pot for life’
The power to choose
Currently under automatic enrolment, employers select the pension scheme provider for their employees, often with the help of an adviser.
The new ‘pot for life’ concept will give employees the power to choose their own pension provider and ask their employer, as well as any future employers, to pay into the retirement fund of their choice. This means that the control will be in the hands of the saver, who can choose a pension scheme which best reflects their needs.
There are a number of ways in which this could benefit the saver. The more investment-savvy savers could choose a pension provider which offers access to a wider selection of investments. Similarly, savers closer to retirement can arrange their savings in a way which reflects their personal retirement plan, instead of relying on the default options offered through a workplace scheme, whilst ensuring their pension allows them to access their funds in a flexible manner when they come to require an income.
There could also be other non-financial benefits, such as allowing savers to improve their retirement saving experience by choosing a pension provider which has good online functionality or helpful customer service, for example.
Reduce number of deferred small pension pots
The ‘pot for life’ scheme could help to minimise the proliferation of deferred small pension pots spread across numerous pension schemes or providers. Instead, future pension contributions can be paid into a single scheme of the employee’s choice, regardless of however many employments they have during their working lifetime. This could give people greater knowledge of where their savings are and how much they have. Having a ‘pot for life’ could foster a better engagement for people and their pension savings, rather than it being outside of their control and left to an employer to deal with.
The negatives of a pension ‘pot for life’
Risk of making the wrong decision
One of the main drawbacks to instating one pension ‘pot for life’ is that it could make the retirement saving process even more confusing for people who do not seek financial advice. If savers are left to select their own investments without a full understanding of what they are investing in and whether it is appropriate for them, a wrong or ill-informed decision could easily be made. Making a mistake like this on one sole pension pot could have a huge impact on a retirement.
There is also the risk for younger savers who may miss out on potential growth throughout their working lives, and to savers intending to access their pension in the near future being subject to levels of investment risk which could damage their retirement savings. This is something which many workplace pension schemes attempt to address through their default investment options and ‘target retirement date’ funds.
In addition, allowing savers to choose their own pension providers could also lead to an increased risk of scams. Having the right guidance and support from an employer and financial planner can help to avoid these risks.
Negative impact on employers
This concept of a pension ‘pot for life’ could also have a negative impact on employers and businesses. Pension schemes are often used to as a means to attract and retain employees, as well as helping them to achieve greater financial security for their retirement. However, the ‘pot for life’ concept may damage this relationship, risking lower employer contributions and support in the workplace if employers feel they’re no longer at the centre of the pension provision for their employees.
It could also mean some logistical work required from finance teams across the country, who will need to adapt to the possibility of employees choosing different providers rather than one provider for the business.
The reforms could also have unintended consequences on where pension providers focus their attention. Employers are currently able to negotiate better terms such as reduced charges with pension providers, benefitting from the bargaining power of grouping together the savings of their employees. However, a market where pension savers are encouraged to arrange their own pensions could lead to providers focusing their attention on savers with larger pension pots which are more profitable for them, leaving those with smaller savings with less choice.
Seek professional advice
Whether you have one pension ‘pot for life’ or multiple pensions with a range of different providers, it is important that you work with a financial planner in order to understand what it is you are investing in, and whether it is appropriate for your particular needs and goals.
If you would like to discuss your retirement plans after this pension announcement, please do get in touch with our team of Chartered Financial Planners.
