In his Autumn Statement speech chancellor Jeremy Hunt announced he would consult on “giving savers a legal right to require a new employer to pay pension contributions into their existing pension pot if they choose”.
In one short sentence he may have made as big a change as his forebear George Osborne did with his pension freedoms and choice announcement nine years ago.
I well recall my own first day of employment when as a spotty teenager I joined the mighty Prudential. They wanted to take me across the road to the local Midland Bank as they paid all staff salaries into employees’ bank accounts, and Prudential had negotiated superior terms with Midland over account eligibility and charges.
They seemed a bit hurt when I declined and said I already had a bank account and perhaps they could pay my salary in there. Reluctantly they agreed.
Today of course everybody chooses their own bank and employers do not get involved with introductions to your local branch manager or negotiating special terms for banking.
It may never happen. It is a two-month consultation that opened today; we might possibly have the next general election before the government publishes its response to consultation comments and determines next steps. So, the idea might all be swept away in a coming change of government.
I can see a number of possible axes for competition between pension providers.It has got me thinking about how lifetime pension providers might compete with each other as they sign up savers to being their chosen home for workplace pension contributions from all future employers.
The most obvious change is that this competition will take place at the level of the individual saver, quite differently from today where the employer chooses, and the employee usually has no say.
In order to get that valuable employer’s pension contribution, both the employer’s money and the employee’s own contribution have to go into the scheme chosen by the employer.
The employee has the freedom to direct the investment of their pot within the scheme, but this decision-making is limited to whatever narrow range of funds the scheme chooses to support.
It is widely accepted within the pensions market that competition today, at the employer level, is very largely on price. There may be more than one round, in a reverse auction process, with the scheme the employer quite likes being given the chance to cut their price to become the lowest and, ultimately, successful bidder.
Attempts by both the Financial Conduct Authority and The Pensions Regulator to shift the mindset away from price to genuine value for money have not yet succeeded.
And the default investment fund into which most of the contributions go remains largely built on low-cost tracker-style investments, with only very limited exposure to illiquids like infrastructure or growing companies because of the higher fees that these bring.
In the chancellor’s brave new world of individual savers choosing their ‘pot for life’, I can see a number of possible axes for competition between pension providers:
Price: In DC pensions the charges levied by providers are highly visible. Maybe individuals will simply carry on where employers left off and choose the lowest charging provider.
Investment destinations: Will lifetime pot providers dangle the carrot of superior net long-term returns by investing in infrastructure and nascent British businesses, as the chancellor clearly hopes?
Perhaps a compelling story if the buyers stop to understand how long-term pensions work. However, rather like organic vegetables, the benefits may seem too nebulous.
Investment track record: Savers have a history here already, and in Isas we have certainly seen fund managers that have successfully attracted large inflows from retail savers keen to bet on a previously winning horse.
Advertising spend: Through extensive advertising on TV, internet and roadside posters we may see lifetime pot providers building their brand and persuading savers, who often know very little about pensions, that they are the ones to trust.
Member get member: It is a horrible thought that the reason someone might choose their lifetime pension provider is because their friend shared £100 cashback for introducing them.
But behavioural science has proved that people place far too much weight on near-term benefits – that cashback, free pen or umbrella – than they do on matters of longer-term importance like their prospective retirement income level.
And in complicated and unfamiliar areas like pensions where savers do not know who to trust, they may well listen to and trust their friends.
The chancellor is sparking a major reform and that the consequences probably will not be the ones he is expecting.Advisers should prepare themselves for future questions from clients asking whether they should exercise the new freedom that Hunt is going to give them requiring their employer to re-direct the workplace pension contributions into their self-invested personal pension, or other chosen lifetime pot.
I do not think it will be an easy question to answer, as it really merits a deeper understanding of the client’s lifetime aims and ambitions from all savings. Will a lifetime pot better meet these aims than the scheme the employer has chosen?
Is the risk level of either scheme appropriate for the client? Does the investment approach of the employer scheme function as a diversifier for the client’s whole portfolio or is it concentrating risks already present in their other savings vehicles?
Before embarking on this journey, advisers would do well to remember that we have been here before, with the iron lady, Margaret Thatcher.
She too was an enthusiastic Conservative reformer, giving employees the right to opt out of company pensions and have their own personal pensions, and to choose free standing additional voluntary contributions over company AVC plans.
Some savers sought regulated advice on their choice and turned it into a ‘heads I win, tails you lose’ scenario.
If the plan recommended by their adviser did well, they were happy. However, if it turned out they would have been better staying with the company scheme, they made a compensation claim against their adviser – alleged pension mis-sales aplenty.
I am left with the feeling that the chancellor is sparking a major reform and that the consequences probably will not be the ones he is expecting.
Adrian Boulding is director of retirement strategy at Dunstan Thomas
