Hargreaves Lansdown has today (4 July) published a policy paper on an auto-enrolment shake-up that the Bristol-based intermediary claimed would encourage savings among self-employed workers.
FTAdviser reported last month that the execution-only investment platform is lobbying the government to introduce new rules that would allow individuals to keep their old pension provider after they change jobs.
Hargreaves idea differs from pot-follows-member - a system halted by former pension minister Baroness Ros Altmann - to allow a saver's auto-enrolment pension to follow them from job to job, by transferring the funds from provider to provider.
The firm’s proposal is to give investors with a pre-existing pension who join a new employer the right to choose that previous provider, rather than joining their new employer’s scheme and ending up with a new pension arrangement.
Nothing would change in the current auto-enrolment system unless the individual makes an active choice to request the employer pays the pension contributions into an existing pension.
With only 16 per cent of self-employed workers saving into a pension through auto-enrolment, several industry players and pensions experts have proposed solutions to address this gap.
If Hargreaves proposal was implemented, individuals would have the right to choose their pension provider, creating a link between the pension scheme and the individual which doesn’t exist today, the firm argued.
The pension provider would be incentivised to look after the customer more diligently and to reach out to them when they go self-employed, encouraging them to continue saving.
According to Tom McPhail, head of policy at Hargreaves Lansdown, the "problem isn’t so much ‘how do we get the self-employed to join pensions’ as ‘having enrolled people once when they were in employment, how do we ensure they keep on saving when they go self-employed?’”
With the average age for first opting for self-employment being 32-years-old, Mr McPhail said this means that most of these workers go through employment at some stage in their working lives.
Mr McPhail said: “The longer someone has a pension arrangement, the more likely they are to engage with it.
“Our own research shows in the early years 44 per cent of group pension members are disengaged but by year 10 this has dropped to just 11 per cent.”
The government and regulator have been criticised for failing to come up with a joint approach to reforming the pension system for the self-employed.
Hargreaves argued that its proposal for auto-enrolment would help to solve the problem of dormant pension pots, which according to an estimate by the Department for Work & Pensions (DWP) will reach 50 million by the middle of the century.
Mr McPhail said: “If we forced employees to change their bank account every time they changed jobs there would be an outcry, yet this is what auto-enrolment does with their pensions.”
The idea from Hargreaves Lansdown would also improve market competition, since giving individuals the right to choose would also force pension providers to look after their customers better, Mr McPhail said.
But the plan has already been criticised by former pensions minister Sir Steve Webb, now director of policy at Royal London, who warns it could collapse the whole basis on which auto-enrolment is built.
Sir Steve argued platforms like Hargreaves would target big pension pots – since a charge cap of 0.75 per isn’t financially attractive for small pots - and this would end distorting the auto-enrolment market.
He said: “In a workplace scheme, the fact that there is a mix of big pots and small pots makes the scheme viable within the charge cap. If someone hoovered up the big pots, many workplace schemes could become unviable except with Nest.”
maria.espadinha@ft.com
