Why a Pot for Life could mean a new dawn for pension saving
In recent months, there have been lots of pension initiatives, including the Value for Money Framework, a proposed solution for multiple small pots and a push for investment into unlisted equities.
But amid all these announcements, the latest from the chancellor stands out: a Pot for Life or a Provider for Life as it’s now sometimes being referred to.
A single pension, chosen by employees
While it’s still in the early stages and there’s a lot to cover before this proposal is anywhere near reality, it shows the direction of travel.
Rather than employees being auto-enrolled into an employer-run pension scheme that’s left behind when they move jobs, the vision is for employees to choose their own pension pot which employers pay into. When they move jobs, the pension pot continues but with a new employer paying in – so no more abandoned pots.
The employer’s responsibility would no longer be about setting up a workplace pension scheme. It would be limited to deducting contributions from salaries and paying them into the pension on time.
There would still be auto-enrolment legislation, but, from an employer perspective, this would only be about compulsory contributions. Everything else would be down to the employee.
A revolution in the workplace
The idea of managing contributions to multiple pension providers might send shivers up the spine of payroll departments. And if you’re a reward manager who’s worked hard to make the pension scheme shine, what will you do to attract and retain skills? We’re talking revolution here, effectively the detachment of pensions from the workplace.
But for this to work, there would need to be a central clearing house so that the employer only has to make one payment. It would be up to the clearing house to divide and disperse monies to potentially multiple pension providers.
In terms of maintaining a competitive edge, reward managers would need to focus on how much the employer is paying. The ‘edge’ would be about monetary value, pure and simple. Employers wouldn’t have to be concerned about choosing a provider and making sure they’re the best value for their employees.
Can a Pot for Life work?
Australia has been running a similar pension model for a several years and it’s working well. It shows how an ‘employee chooses’ model can increase a sense of ownership and even pride. Employees seem more engaged, which is critical to ensuring good retirement outcomes and would certainly solve some issues, including people building up multiple pots over their working lives.
It must be recognised that the present pension system is overly complicated, contributions are woefully low, and people aren’t engaged. As successful as auto enrolment has been, it has resulted in unintended consequences such as multiple pension pots. It’s critical that this issues are solved.
Cushon research shows that this new model is probably more aligned to employees’ wants and needs, with nearly 87% agreeing they would prefer this approach.
But inertia still prevails in pensions, so moving to a model that’s dependent on employee decisions is not going to be quick. Most employees, despite having investment choices, are sitting in default funds – ie not making decisions – and average contributions still hover around auto-enrolment minimum levels.
It’s possible that a system that requires active choice will force engagement, but there would still need to be some sort of default option for those who don’t make an active decision.
Early days
It is still early days but anything that gets people to own their financial future and get engaged has to be a good thing. If it does go ahead, it’s a few years away from implementation, but there does seem to be appetite for it and should be supported.
The government wants to explore the concept in more detail and is interested to hear views from all stakeholders. To this end, it has issued a call for evidence which Cushon will of course respond to.
In the meantime, Cushon continues on its mission to make pensions a force for good and to get people engaged so that they make good decisions before and at retirement. Ultimately, this is what any change has to be about.
In partnership with Cushon
Cushon is an online savings&investments platform provider, offering holistic workplace savings.
