How job mobility has spurred a radical change in pensions

Auto-enrolment has had the unfortunate side effect of giving employees a new pension pot every time they change job. But government plans could change that

More than 10 years ago, policymakers were concerned that there weren’t enough people saving for retirement.

Most people saw the state pension as the backbone of their later life plans, thinking it would be enough to support them. In reality, the state pension would never be able to provide for more than basic needs.

Today, thanks to auto-enrolment, most of the eligible working population are saving into their own pensions. So, what’s the issue?

High job mobility is a spanner in the works

The past decade or so has seen a massive change in employment tenure. The concept of a job for life, at least in the private sector, has disappeared. Across all demographics, people have already had an average of five jobs and this is set to hit double figures within the next few years.

The main downside of auto-enrolment is its link to the workplace. When someone move jobs, their current pension freezes and they start afresh with their new employer.

In the absence of the automatic transfer of their pension, they now have two pots. If, a couple of years later, they move job again, they now have three pension pots. And so it goes on.

The more jobs a person has, the more likely it is that they will forget about some of these pension pots – and in total, the value of lost pensions is nearing £30bn in the UK. It’s a massive problem which is just getting bigger and threatens to undermine the good work that auto-enrolment has done.

But change is coming. The government has stepped in and is looking at two major reforms to deal with this problem.

1. Automatic transfer of small pots

Although higher job mobility isn’t just a trend limited to lower earners or people with smaller pension pots, statistics show we’re more likely to forget about pension pots that have lower values.

And this is where government policy is currently focused – the lower end.

Basically, it is proposing that frozen pension pots of up to £1,000 will be automatically transferred to what they’re calling an ‘approved pension consolidator’.

These consolidators are pre-approved pension providers.

So, as a worker moves jobs, their previous pension pot will be transferred into another pot and eventually they will end up with a maximum of two pots – their current workplace pension and a pension pot that all previous pensions have been consolidated into.

It makes sense. The biggest concerns are that (a) the scheme needs to be widened to include all pensions, regardless of size, and (b) it doesn’t deal with the proximate cause, which is the link with the current employer.

2. Pot for life

The pot for life will be a single pension pot of the employee’s choosing, which follows them from job to job. When they move to a new job, they give their chosen pension pot details to their new employer and they start paying in contributions instead of the previous employer.

If the issue is about high job mobility, let’s sever the link between retirement savings and the workplace. This doesn’t mean stopping employer contributions, but it does mean the choice of pension rests in the emloyee’s hands rather than the employer’s.

As a result, they never accumulate multiple pension pots or risk losing touch with any part of their retirement savings. It’s their pension pot and they have full control.

And this doesn’t create extra work for payroll. Should this initiative go ahead, there will be a central clearing house to act as a single payment point for employers.

Regardless of how many different pension providers your employees choose between them, you will only have to send payments to one place, just as you do now.

The central clearing house will be responsible for dispersing monies to the different pension providers.

It also doesn’t undermine auto-enrolment. Employers will still need to pay contributions to all eligible employees’ pension pots.

And if an employee hasn’t chosen a pension pot, there will be a default option – either the employer’s own scheme or a government-determined provider or providers.

Are employees capable of choosing their own provider?

This question assumes there is a big difference in proposition and costs among pension providers. But this is covered by another government initiative: the Value for Money Framework, which requires all approved providers to focus on providing value for money. If they don’t, they effectively become defunct.

The vision is that employers and employees will be able to see a comparison of value between all pension providers, making it easy to choose the best fit.

Essentially, any provider still in business is a ‘competitive’ provider. Some will provide more value than others but they will all be ‘safe’ options.

The world around us is changing and pensions need to catch up. These government proposals make sure pension savings remain fit for purpose – as the backbone of later life plans.