Lessons from down under: Could a clearing house solve the small pots issue?

UK pensions is at a crucial yet exciting tipping point. We now have the opportunity to move beyond education to genuinely engaging with members and giving them a real choice in their pension arrangements.  

There is an opportunity for the industry to learn from the pioneering approach taken in Australia and transform the UK landscape. Member choice is key.  Elevating member knowledge and demand for greater pension responsibility simply by making it easier for people to engage through the channels that best suit them would be a huge leap forward in successfully resetting UK pensions and setting a pathway to a much more sustainable future.   

Australia’s superannuation system has been named the number one market in the global pensions assets study by the Thinking Ahead Institute with 20-year pension asset growth of 11.3 per cent per annum. Totalling $3.5 trillion AUD (£1.83 trillion), the substantive growth and consistency of the industry has strengthened Australia’s economy and bolstered a strong future for increasing waves of retirees as the system enters into full 30-year maturity.

The tenure of the Australian system, as it has navigated many ongoing challenges, poses a host of intriguing lessons that we believe we can learn from. Its pillars of strength and success are its robust regulators, long-term focused reform, effective DC consolidation and efforts to re-centre members at the heart of its system and ensure engagement.  

UK pension schemes

Helpfully, there is a notable appetite among UK members for greater involvement. Almost 60 per cent of people feel that they should be more responsible for ensuring they have a good retirement income (versus the government or their employer), with more than half (52 per cent) welcoming the opportunity to pick their own investments and schemes too. 

In addition, 46 per cent of members do not believe that their employers are best placed to pick their retirement at all, and almost half (48 per cent) would rather pick their own pension scheme. There is also appetite for more structural changes to the UK pensions system. More than two thirds (67 per cent) of people would prefer to have a single, super, or consolidated pension and more than three quarters (76 per cent) would like to see pensions ‘porting’ easily with them between employers.   

Pensions clearing house 

By moving to a ‘member decides’ model, there can be a greater resolution to the multiple pots issue, which is more likely to lead to higher engagement from members, better and more informed consumer choices, and larger pots during accumulation. 

Crucially, the industry can take action without waiting for primary legislation. 

The creation of an industry clearing house, through a community interest company or trust and operating on a not-for-profit basis, would allow employers to meet their duties, give control back to employees, and enable pension stapling. It would also allow an employer to pay to multiple funds, still discharge their employer duties, with minimal administrative overhead, but importantly put pension ownership back in the hands of employees, reducing the number of deferred accounts.  

As an Australian /UK provider of pensions technology, Link Group is highly supportive of a ‘pots for life’ and an ‘employee-decides’ model. For over 30 years, we have supported the development of the member-decides model in Australia where we currently support over 40 per cent of the superannuation funds.  

By moving to a ‘member decides’ model, we believe there can be a greater resolution to the multiple pots issue, which is more likely to lead to higher engagement from members, better and more informed consumer choices, and larger pots during accumulation. 

We recommend creating an industry clearing house (through a community interest company or trust and operating on a not for profit basis) which allows employers to meet their duties and gives control back to employees, enabling pension stapling in the UK. 

This will enable an employer to pay to multiple funds, still discharge their employer duties, with minimal administrative overhead, but importantly put pension ownership back in the hands of employees, reducing the number of deferred accounts. 

How could a new clearing house system work? 

Employers duties are carried out either by payroll, the employer or the clearing house and those records retained much as they are today. 

Employees choose their own scheme based on their own criteria, the only proviso being that the scheme needs to be a part of the clearing house. 

Employers collect and pay contributions as they do today, but to the clearing house that instantly passes these on to the schemes chosen by their employees. Communications are handled by the scheme as they are today and certificates of compliance are handled by the clearing house. 

When an employee changes employer they can take their pot with them, simply having contributions paid by their new employer to the clearing house for investment into their chosen pot. 

If an employee wants to change their contributions they can do that, as today, with their scheme or employer, the clearing house picks up these changes through feeds from the employers and by API with the schemes. 

Link Group is actively engaging policy makers and officials to share its views on the potential for a UK clearing house. Indeed, the UK / Australia free trade agreement encourages our two countries to share the very best of each other’s capability, technology and talent.  

Moving to a ‘member decides’ model, means can be a greater resolution to the multiple pots issue, which is more likely to lead to higher engagement from members, better and more informed consumer choices, and larger pots during accumulation. 

We recommend creating an industry clearing house - through a community interest company or trust and operating on a not for profit basis - which allows employers to meet their duties and gives control back to employees, enabling pension stapling in the UK. 

This will enable an employer to pay to multiple funds, still discharge their employer duties, with minimal administrative overhead, but importantly put pension ownership back in the hands of employees, reducing the number of deferred accounts. 

There is a better way - where schemes operate in the best interest of members to attract engaged employees who are keen for choice and employers have simple, easy to administer duties that concentrate on getting people into pension saving early in their career.  

Richard Wilson is general manager of Link Group’s retirement solutions business in UK and Europe