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.
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:
