What does 'pot for life' mean and how far it should go?

Government’s call for evidence

Pot for life proposals will be ground-breaking and signal a shift from “employer choice” to “member choice”, the industry said, but what does it mean for industry and how far will it go?

Yesterday the FT reported that Chancellor Jeremy Hunt would use his Autumn Statement today (22 November) to unveil "pot for life" reforms, giving workers the right to nominate the pension scheme their employers pay contributions to - an approach similar to that taken by countries such as Australia.

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A Treasury insider told the FT: "Helping people keep the same pension pot will stop billions of pounds being needlessly lost and make sure tomorrow's pensioners benefit from every penny they save."

Eversheds Sutherland partner Michael Jones said, if announced, the measures would be "ground-breaking" and "signal a shift from employer choice to member choice in the UK pensions system".

He said: "By giving savers the choice of where their employer's pension contributions are directed, the government hopes to raise engagement in and awareness of pensions, reduce the creation of a new small pots every time an individual changes jobs and for individuals to take ownership of their pension savings and wider financial planning."

Jones added, however, there was much to do before pot for life becomes a reality - noting that cross-party support was essential if these measures were to succeed.

He said: "A call for evidence is the first step and we expect this to ask the question: ‘What does pot for life mean and how far it should go?'

"Giving savers a simple choice is much easier to achieve than a true Australian-style pot for life system where savers are automatically ‘stapled' to their current pension provider on changing jobs, and which likely requires a clearing house and significant change to the existing pensions infrastructure."

He added: "Policy makers need to consider any pot for life proposal in conjunction with small pots consolidators and dashboards; all these initiatives complement and interlink with each other."

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Shula PR and Policy founder and managing director Darren Philp agreed the move to a pot for life system would need careful thought.

He said: "Any such move towards a pot for life model needs careful thought and consideration and will be years in the making."

But he said there could be some "real positives" in such a move if it went ahead.

Philp added: "There are some real positives in that it would help connect people with their pensions, and should encourage competition and innovation as providers/schemes will no longer be able to rely on inertia alone to sustain their business models.

"Most importantly, we need to ensure that any reform is in the members' long-term interests. As far as pensions is concerned the current political lens is consolidation and hence productive finance, but unless any reform is carefully implemented and puts the members first it will ultimately fail to deliver better pensions."

A simple or more complex pot for life?

The Lang Cat director of public affairs Tom McPhail explained there were a range of pot for life versions that could be implemented.

He said: "The simple version of pot for life - member choice - is just about giving employees the right to choose which pension they join and where their employer pays their contributions.

"The more complex version involves eliminating altogether the current employer role of designating a workplace pension for their staff. Under this scenario, when someone first joins a new job, they would be automatically allocated a pension from a small pool of big pension schemes. This is akin to the Australian system of ‘stapling'."

McPhail said it was unclear what version the Treasury is likely to go for, but noted the fact this was due to begin with a call for evidence suggested the government thought the plan was a good idea but needed to hear "arguments for and against". He also warned the reform would not be quick.

He explained: "It would be possible to legislate for member choice this side of the general election, however getting all the ducks in a row will take longer.

"An important question is how it could be delivered in a way that would not be disruptive for employers. This would probably require the development of a clearing house system to manage the payments to multiple pension providers. This will take longer than we have left before the election."

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Pinsent Masons pensions partner Simon Laight said pot for life was a "seismic" reform for pensions - and agreed it could create significant industry disruption.

He said: "If the buying decision is moved to the employee, pension providers will have to re-engineer their distribution channels. They will be selling to individuals, rather than to corporates, converting workplace pensions savings into a retail market. There will not be financial advisers to serve the market, so direct to consumer will become dominant. The bigger providers will be able to adapt - improve the attractiveness of their proposition, find introducer arrangements with affinity groups, invest in sales drives. It will lead to consolidation with an expected smaller number of larger providers."

Laight added: "Buying a pension is fundamentally different from shopping around for petrol. Not everyone is knowledgeable on pensions and consumers need protection as they might mis-buy. We need to guard against the pension mis-selling scandals of the past."

Suboptimal choice

Barnett Waddingham partner and head of defined contribution Mark Futcher said that, while it was easy to see why the chancellor might be tempted to let employees choose their own pension fund, the UK system was "wildly different" to the one in Australia.

He said: "The context in the UK is wildly different; we already have a mature employer-based pension system, in which the employer is partly responsible for ensuring members get good value.

"A sudden shift to a ‘pot for life' risks people choosing a suboptimal pension plan, being swayed by marketing over value, and ultimately exacerbating the UK's retirement crisis."

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Futcher added: "What is more, the rumoured shift to a nominated scheme would not necessarily solve the problem of savers having multiple pots, or solve the government's desire for big schemes investing in high-growth UK assets - this seems to be a lose, lose, lose policy."

He added that, while he believed there was plenty of room for change in the UK's pension system, it would only succeed if adequate time, resource and effort was put into building it.

Futcher explained: "For pot for life to work, there must be a robust central clearing house, a working pension dashboard, and a faultless administration system which directs contributions and amplifies the employers' critical role in ensuring value and good governance. 24 hours' notice to a system overhaul can only result in one thing; chaos."