‘Pot for life’: what are the knock-on effects?

My previous column for Pensions Expert referred to retirement defaults as an ambiguous distraction, and asked that proponents say exactly what their solution is. In this column, I make the same request about ‘pot for life’.

The same soundbites, ‘pot for life’ or ‘lifetime provider’, describe two very distinct policy ideas which could be introduced alone or in combination:

-       A duty on employers to pay workplace pension contributions into a pension of the employee’s choice (I call this ‘member choice’ in this article)

-       A duty on employers to pay workplace pension contributions into an employee’s first pension if they don’t say otherwise (in this article, ‘stapling’)

Let’s take those two definitions in turn. I’m not attempting a demolition job on either, or to laud either unquestioningly. Others have done that, or noted the pros and cons, lessons from Australia, or set out the ‘how’. But everyone in the sector needs to consider the knock-on effects of each model.

Member choice would shift the market – that’s the point of it. Of course, it would help those savers who make use of it. But we need to work out the system-wide economic impacts: the implications for employers, providers, and ultimately and most importantly, all savers. What might those effects be?

It’s been widely commented that competing providers would look to attract savers who have bigger pots. Naturally, if they’re successful at that, then it shifts the economics of providing a workplace pension.

At least since the advent of stakeholder pensions and percentage-based charging, there's been a widespread cross-subsidy in workplace pensions, from large pots to small ones.

Regulators don’t normally like cross-subsidies, but everyone seems happy with this one, being a transfer from the wealthy to the less wealthy. Nothing has disturbed it, but member choice could smash it to bits. 

Why bother with the slog of the auto-enrolment market if you can attract people who have accumulated bigger pots elsewhere? Some of the biggest master trusts, open to all employers, have combination charges but these have faced scrutiny, and policy intervention in the shape of a ban on flat fees on the smallest pots.

It’s unrealistic to expect people with tiny pots to pay the full costs of administering them, so something would have to give. The scale of the potential impacts, and on competition for employers’ business, is unclear, but it needs some detailed thought. 

Several commentators have asked whether a saver could choose any pension at all. Would it have to be an AE qualifying scheme, or would any personal pension be OK?

We could expect other controls on receiving schemes, such as a ban on providers stipulating minimum pot sizes or minimum contributions, wider controls on charges or charging structures, or a further extension of Independent Governance Committees. I’m not calling for these, but it feels like further intervention in the personal pension market could follow.

This makes me wonder – is this why the FCA is rushing out a consultation on Value for Money in Spring 2024, alone rather than jointly with DWP or TPR (though they continue to work together on it)?

Will this see the FCA extending its VFM framework to non-workplace pensions as many people have called for? If so, they should be open about it. In any case, it needs to be done in a measured way that isn’t rushed, ensures the regulators implement at the same time, and avoids market distortions in either direction.

So proponents of member choice will need to be careful what they wish for; and its critics need to sharpen some of their arguments

If member choice would be a big disruption for workplace pensions, stapling is nothing short of a fundamental redesign of auto-enrolment. It’s much more like a ‘personal accounts’ model of the kind mooted in the noughties, and would be an entirely valid way of designing an automatic enrolment system from scratch. Except we’re not designing it from scratch, we’re already eleven years in.

Stapling was introduced in 2021 in Australia, but Australia is different in many ways – not least the very large, sector-specific schemes. What if my first pension was with a single employer scheme that has no interest in administering new contributions from rivals or unknown employers?

Consolidation is rapidly shrinking the number of single employer schemes, but unless they all disappear, the duties around stapling would need to go further. They would either need to compel single-employer schemes to continue to receive contributions after the saver has left service; or the employer duty would be complicated further, so that they pay workplace contributions into the member’s first pension that is willing to accept them. 

It would also change the economics of workplace pensions, but particularly at the interface of provider and employer.

Employers who hire lots of first-time savers would become much more attractive clients for providers to target in the hope that it will be a pot for life – for example, supermarkets and café chains. Indeed, back in Australia, the sector-wide schemes for retail and hospitality are among the largest, and have been growing since stapling.

Furthermore, DWP’s paper also talks about an exception for ‘better’ schemes, so that contributions go into one of those if the employee has one. This is another ripple effect to consider – as well as how ‘better’ pensions would be defined and found, if the stapling model breaks the employer connection underpinning automatic enrolment, it raises the question of whether employers would still have the incentive to do more than the minimum for their employees.

The industry works best when it constructively challenges policy proposals – and the industry is best placed to think through scenarios of what could happen next.

Rob Yuille is head of long-term savings at the Association of British Insurers.