Government pensions proposals – sent out for consultation in last week’s autumn statement – have the potential to empower individuals, prevent them from having to keep track of multiple disparate pots and help them achieve better value for money.
In a paper published today by the Social Market Foundation think tank, Michael Johnson – one of Britain’s leading authorities on pensions policy – sets out a plan for introducing much greater consumer choice and control over their pension. The pensions minister, Paul Maynard, has also provided a foreword to the report, in which he described Johnson’s proposals as: “an interesting perspective on the benefits of member choice and a single pot for life approach.”
Creating a single ‘pot for life’, into which workers can direct a whole career of different employer contributions, would be the best way to deal with the ‘small pots’ problem identified by the Department of Work and Pensions (DWP).
In the Autumn Statement, the government issued a call for evidence on the ‘lifetime provider’ model, which allows consumers to stick with a single pension pot over their entire career. Johnson’s piece argues that this should be achieved through ‘member choice’, whereby members of workplace pension schemes would be given the right to choose the pension scheme (and provider) into which both their employee and employer contributions are paid.
A decade ago, the introduction of ‘auto-enrolment’ required employers to add their workers to pensions scheme, unless they explicitly opt out. However, this has meant that people are enrolled in new schemes every time they switch employers. As a result, roughly 20 million ‘small pots’ containing less than £10,000 have been created. These are difficult to keep track of, with over 2.8 million pots considered lost (some 9% of all pots). With retirement savings spread across multiple pots (with some potentially ‘lost’), many employees face smaller retirement incomes than otherwise, an issue which the ‘pot for life’ proposals aim to address.
These small pots are also expensive to administer; the pensions industry is estimated to lose £225 million a year on them.
The Autumn Statement also confirmed the intention to establish multiple consolidators to help reduce the existing stock of small, deferred pension pots. Johnson emphasises that adopting the proposals on consolidation alone would fail to stem the ongoing annual creation (“flow”) of over one million new sub-£1,000 pots, fuelled by automatic enrolment. In addition, as the minimum age for auto-enrolment is set to fall from 22 years to 18 years, the profusion of small pots is likely to accelerate.
According to Johnson, the “logical policy destination is ultimately a system where individuals have a single pot at one provider, for life”.
Johnson proposes that the introduction of member choice could be implemented in two stages:
- Individuals could be given the right to choose where their contributions are paid into by their current employer.
- Subsequently, individuals’ chosen provider could become their default (i.e. automatic) arrangement.
Johnson argues that giving individuals control of their workplace-derived savings, through the exercise of member choice, would engender a sense of ownership, thereby driving engagement with the pension system and more pot consolidation. In addition, competition for pots amongst providers would improve value for money, leading to larger pots and, ultimately, larger retirement incomes.
Michael Johnson said:
“The introduction of member choice, focused on arresting the ongoing flow of new small pots, would complement the DWP’s proposal for consolidators to help reduce the existing stock of small deferred pots. Both initiatives should be viewed as enhancements to, and natural evolutions of, the auto-enrolment regime.”
Member choice would also represent a significant stepping stone towards a single (pensions) pot for life, facilitated by common sense and digital capability. Simplicity to the fore.”
Minister for Pensions Paul Maynard, in a foreword to the report said:
“The Social Market Foundation’s report provides an interesting perspective on the benefits of member choice and a single pot for life approach. I would encourage all of industry to engage in this discussion and respond to the DWP’s Call for Evidence on the matter – to help inform the development of a longer-term pensions policy. My objective will be to ensure that the interest of savers and their outcomes in retirement remains at the heart of our decisions.”
Lawrence Churchill CBE, in a foreword to the report said:
This policy paper sets out a solution which begins with the end in mind – empowerment of the individual to direct their own contributions to the provider of their choice (as has already happened in Australia) and sets out how it can be overlaid onto an occupational pension system.
I commend Michael and Tom for thinking through the various issues to be addressed and I hope that the brightest and best in the industry will take up the challenge and respond to the Government’s Call for Evidence to help develop this policy into a future reality.”
Notes
- The briefing will be published at https://www.smf.co.uk/publications/member-choice-pensions/ on Wednesday 13th December 2023.
- The report is published by the Social Market Foundation. The author retains full editorial independence.
Contact
- For media enquiries, please contact press@smf.co.uk
- In addition, Michael Johnson can be contacted via majohnson@talktalk.net