Chancellor proposes ‘pots for life’ in major pension reforms

The Chancellor has revealed plans to offer UK workers a ‘pot for life’ as part of a package of transformational pension reforms.

Jeremy Hunt announced proposals to give employees the legal right to pay their pension contributions into an existing pension scheme rather than into their new employer’s pension scheme when changing jobs.

He made the announcement during the autumn statement on Wednesday and will now consult to gather views from the pensions industry.

Hunt said: "I will consult on giving savers a legal right to require a new employer to pay contributions into their existing pot. This would give savers one pot for life.”

Idea comes with risks

Phil Brown, director of policy at People’s Partnership, provider of the People’s Pension, said this package would bring the workplace pensions market closer to the retail banking market with fewer, larger providers, offering similar products and with savers able to choose who to save with. 

He added this could be an attractive evolution for the market but it is a long way off and the regulatory and practical challenges are huge.

Brown said: "The government’s thinking on the lifetime provider model is rightly at an exploratory stage and they acknowledge the potential difficulties. We think the proposal is worth a thorough exploration although it would take years to implement."

It is hoped that the move will minimise the current issue of the proliferation of deferred small pension pots spread across numerous pension schemes or providers because future pension contributions will be paid into a single scheme of the employee’s choice, regardless of how many jobs they have during their working life.

Kate Smith, head of pensions at Aegon, said that the ‘pot for life’ may appeal to employees who take a hands-on approach to their workplace pension, but warned there are risks of poorer retirement outcomes for millions of employees if employers feel they are no longer at the centre of the pension provision for their employees.

Smith said: “Pension schemes can be used as a means to attract and retain employees, as well as helping them to achieve greater financial security for life after work, helping them to retire. Many employers go beyond the statutory auto-enrolment 8% minimum by paying higher pension contributions, and by providing employee support to increase their engagement with pensions.

“The ‘pot for life’ concept may damage this relationship, and could lead to lower employer contributions and support in the workplace. It could also mean fundamental changes to how workplace pensions work today, so the concept needs careful consideration alongside other pension policy priorities – such as the value for money agenda.”

David Hilton, UK head of pension product at Employment Hero, said although this kind of pension reform has some serious benefits on paper, the government will have a big fight getting it over the line. 

He added: “This would create far more work for everyone involved: The pension funds who would have to directly market themselves to employees and change their systems to be less employer-focused, employers who would have to pay contributions to multiple pensions in every payroll, and employees would need to figure out what pension is best for them.

“The whole point of auto enrolment was to use the power of inertia and make sure each employee didn’t have to make a decision about pensions. It wasn’t just the financially literate investing in pensions - it was everyone.”

Hilton added that good technology will be essential if it does go ahead.

He said: “Employers will have far more complex pension systems to work out and would need to create new connections with possibly dozens of different pension funds, instead of the single one they do now.”

Undoing the good work of auto-enrolment

Further worries were expressed by Hannah English, head of DC corporate consulting at Hymans Robertson, who raised concerns around proposals to allow members to manage and determine where both their deferred and current DC pots are invested.

She said: "We are cautious about the proposals to allow members to manage and determine where both their deferred and current DC pots are invested.  Introducing such changes would put an overwhelming amount of responsibility on members to ensure they make the best decision possible in the most informed way.

“Current lack of understanding of savings vehicles amongst the average saver could result in savers making poor decisions about where their pot is invested, perhaps making decisions based on the cheapest solutions or those that are the most marketed, rather than those that offer the best value for money.

“Education to savers would need to be carefully managed as part of this initiative. Auto-enrolment was incredibly successful due to the inertia of members and we don’t want to undo the good work done here.”

Gail Izat, managing director for workplace at Standard Life, said while a pot for life might be appealing, there are bigger priorities facing savers that the pension industry should tackle first. 

She said: “A pot for life might be appealing from a simplicity perspective as the pension could follow people from job to job but there are bigger priorities facing savers and the pension industry that we would tackle first.

“These include ensuring contribution levels are adequate to provide people with a decent retirement income, identifying ways to extend advice and guidance to those struggling to make decisions and implementing the government’s value for money framework that will empower people to determine whether their pension offers good value.”