Pensions have risen up the political agenda in recent months, primarily as they are now seen as part of the solution to the pervasive problem of sluggish economic growth. Rightly so.
Most commentators agree that there is a marriage to be made between the demand for long-term capital and the supply of long-term assets found in retirement funds.
This principle has been extended under the theme of consolidation, whereby anything that increases scale should increase the capacity for illiquid investment. Again, there is merit in this argument.
Consolidating providers and schemes may increase scale, but the argument is far less clear at the level of the individual saver, where scale already exists in the form of pooling funds.
Here, the government has proposed a multiple-default consolidator model, allied with ‘stapling’ of new pensions money going forward.
In practice, this means small pension pots could be allocated to a pension provider by default, after which all new money saved into a pension with any employer returns to this designated pot. Or employees make their own choice of pension provider.
Another phrase used is to describe this approach is having a ‘pot for life.’
This is a very significant change to the way we have built auto-enrolment, where employers have championed the cause to get people saving.
Instead, pension arrangements among employees would be gradually individualised, not collectivised within an ‘employer scheme.’ Employers couldn’t really describe to employees what the pension proposition is, rather, just that they will pay contributions. Beyond that, the proposition would depend entirely on each member’s provider.
Paying pensions contributions to different providers would be complex for employers, but the real problem is one of governance.
What happens when an employee asks their employer to make payments to a higher risk pension, or one which might be a scam? It raises the obvious question of who is going to protect people from making poor decisions, and who is accountable when they do?
The work needed to make a change on this scale is enormous. The infrastructure needed to identify members and their pots, and move that money automatically without consent, goes beyond that required for the pensions dashboard – and we know just how complicated that has proved to be.
The benefits of the dashboard are clear – the digitalisation of pensions for savers – but the benefits of moving from a collective employer scheme model to one of individual pensions are far less clear.
And there is a serious risk of disenfranchising employers, the very people who drove the success of AE in the first place.
What’s clear is that ‘pot for life’ is an interesting, but largely untested, idea for policy change. The various claims about improving retirement outcomes are hypothetical, and the investment case for the economy unproven.
