The Conservative Party certainly enjoy a good pensions shakeup! Since they came to power in 2010, we’ve had automatic enrolment, the pension freedoms and the Mansion House Compact. All huge changes.
Today’s Autumn Statement builds upon that tradition. The headline grabber, from a pensions point of view, will be the plan to give workers a “pot for life”. It’s proposed everyone will have a right to nominate the pension their employer pays into. Just like how you choose your own bank account for your wages. Employers will still need to offer a workplace pension, but some staff might choose for their contributions to be paid elsewhere.
The main benefit suggested is that it will help solve the small pots problem. By allowing people to choose a single pension provider for life, they won’t build up a filing cabinet full of pension statements. But there are two other potential side effects – one good, one bad – and the long-term consequences could be quite ugly.
Starting with the good, we know the workplace pensions market is an odd one from a competitive point of view. Without the right to change providers, workers can’t hold their pension provider to account if they receive poor service. And therefore providers can, in theory, focus on the needs of employers to keep hold of the regular contributions. The 2013 Office of Fair Trading report highlighted this and since then there have been numerous regulatory interventions to keep the market in check (e.g. Independent Governance Committees, value for money assessments, consumer duty).
By giving workers control, providers will be directly incentivised to offer better service; both to retain customers and to ‘win’ them from other providers. This policy would make the market more competitive and hopefully this will lead to better outcomes.
The main concern with this proposal is the risk members make poor decisions.
Currently, employers use their buying power and ability to afford advice to choose the right provider for their workforce. Competitive pressure comes from the employer being incentivised to offer a good employee benefits package and therefore potentially changing providers if they’re not happy.
In reality we know pensions are low down the priority list for many employers (particularly smaller ones). So this competitive pressure often doesn’t bite.
Unfortunately, the same is true for most workers and those who are inclined to switch might end up getting a worse deal. They could swap a good value workplace scheme for one that has higher charges, inept support and limited investment opportunities.
Thinking long term, this change could have a damaging impact on how much time and effort employers put into pensions.
As it stands, they’re responsible for picking the pension provider they think is right for their employees. But if staff also have the option to choose their own pension provider, could this mean there’s less pressure on employers to get it right?
Improvements in what a company offer their staff often come about from a vocal and engaged minority raising issues about the current pension provider to HR. But if those people just choose their own provider, they won’t raise concerns and therefore employers might pay less attention to pensions. It’s an ugly, unintended, side effect that needs to be thought through carefully.
But that’s not all…
Aside from the “pot for life” announcement, the Chancellor also announced measures to boost investment in British start-ups. This includes building upon the Mansion House reforms by launching a new growth fund through the British Business Bank.
The hope is that these start-ups are the winners of the future and will both boost pension pots and the British economy. The challenge for pension decision makers is whether high-risk British investment opportunities are likely to be more rewarding than overseas options. By launching this fund, at least it will be easier for pension funds to invest in promising British businesses.
If you’re interested in discussing any of these announcements please get in touch.