With the government seeking to establish and build upon its growth agenda in what would likely be the last full year before the general election, we saw the chancellor announce a tsunami of pension consultations and policy changes over the past 12 months.
The latest, and most radical, if taken forward will fundamentally alter the way we all prepare for our well-earned retirement: the development of a new lifetime provider model, most commonly known as a ‘pot for life’.
However, there was no mention of retirement income adequacy or the need for higher pension contributions, which matter most in delivering better retirement outcomes.
When the consultation was announced as part of the Autumn Statement in November 2023, the proposal was widely condemned by pensions providers.
And following the closure of the Department for Work and Pensions’ call for evidence last month ("Looking to the future: Great member security and rebalancing risk"), there is no sign of that mood changing.
The idea is to put in place a new pensions framework where employees save in one pension pot for life, rather than having multiple pensions pots as they jump from job to job.
Instead of being auto-enrolled into their new employer’s pension scheme, they would be auto-enrolled into a default lifetime pension provider or a pension scheme, such as a self-invested personal pension, of their own choice.
The move is designed to stop the creation of millions of new pensions, removing the inefficiencies of small and multiple pots. And the government believes it would improve member engagement, as pension saving would all be in the same place, giving individuals greater visibility of the totality of their pension fund.
Boosting engagement is a laudable aim and a pot for life could deliver for some, especially the wealthy and those who use advisers, but we question whether it would move the dial for the majority who would have to go it alone.
A number of objectives were listed in the government’s paper, but one thing missing was any mention of the need to improve retirement income adequacy for all pension savers.
I strongly believe that improving retirement income adequacy needs to be the overarching objective of any pension policy. And while lower charges and higher investment returns can help, that inevitably means increased pension contributions.
One mitigator to this would be to increase AE contributions. This should be phased in before a lifetime model is even considered. One unintended consequence of the lifetime provider model is that both employees and employers could end up paying lower pension contributions, leading to poorer member outcomes and greater reliance on the state in later life. This is exactly the opposite of what is needed.
The relatively low level of pension saving in the UK is a political time bomb waiting to go off, as the majority of employees paying at the AE minimum are lulled into a false sense of security that a combined 8 per cent of band earnings means they have saved enough.
The unfortunate truth is that more needs to be saved into pensions and individuals need more financial support, not less. Removing employers from the heart of pensions could be detrimental to employees’ retirement outcomes.
Of course, not all employers are the same, but many see the benefit of paying more than the AE minimum contribution and providing support in the workplace, including targeted pension campaigns to improve member engagement. This helps employers to attract and retain staff as well as supporting better financial wellbeing.
In Aegon’s experience, working with employers to support campaigns leads to positive member outcomes. The question is, will removing employers from the pension equation lead to levelling down, both of pension contributions and support? I fear it could and it’s something the government needs to explore.
One mitigator to this would be to increase AE contributions to, say, 12 per cent, where the employer pays at least 6 per cent, with flexibility for those on lower incomes to minimise the opt-out rate. This should be phased in before a lifetime model is even considered.
This brings me to the multitude of policy initiatives already in flow that could go some way to solving the proliferation of pension pots issue and increase employee engagement, meaning that lifetime providers may not be needed.
This includes the scheme consolidation agenda, value for money framework, pension dashboards, default small pot consolidators, changes to the advice-guidance boundary, along with much greater pension digitalisation.
The relatively low level of pension saving in the UK is a political time bomb waiting to go off.Sequencing of ongoing and future initiatives will also be important, as many will provide the building blocks for the future of pension saving. The pension environment could look quite different in 10 years’ time with fewer but much larger pension schemes, so individuals will more likely be saving in the same scheme.
This could reduce the proliferation of future pension pots, with the smallest pots automatically transferred to default consolidators. And I hope pensions dashboards will allow transactions such as member-led consolidation.
The call for evidence also looked at a collective defined contribution lifetime provider model, which is perhaps premature as neither CDCs or lifetime providers currently exist.
CDCs bring their own challenges, including inertia risk. An individual could be auto-enrolled into a CDC at the age of 18 and never move, but by the time they come to access their pension, their personal circumstances mean that CDC is not the right option for them.
With so many policy and regulatory issues already in full flow, patience is required to ensure the system is fit for purpose in the future, working for all savers.
Kate Smith is head of pensions at Aegon UK
