Pension planning in the UK is complex area. And for a variety of reasons, people don’t seem very keen to engage with their pension. As with any complex problems, the simple solution is invariably the wrong solution or not the complete solution.
Auto-enrolment has seen more people saving for their retirement by building up a private pension through their contributions and those of their employer. But an unintended consequence of such a system has resulted in a ‘small pots problem’. The Chancellor Jeremy Hunt thinks he has a solution to that – a ‘pot for life’.
In his Autumn statement last November, Hunt certainly provided a good deal to think about. One thing that struck me about his speech and the accompanying documents was some of the language used when talking about the changes to pensions and Isas.
There was a clear sense of the Consumer Duty in action with references to “good investor outcomes” and “taking a long-term view”. It’s encouraging to see this mindset of the consumer taking centre stage, with more choice and control, but there is a lot to consider, as well as much we don’t yet know.
Empowering consumers for good outcomes is definitely a step in the right direction, but would a pot or pension provider for life solve the engagement issue?
What else needs to be done to achieve the desired outcomes of getting people to make good financial decisions in the short, medium and long term?
See also: Trading tantrums: Should DIY platforms stop treating investors like children?
Will people suddenly be excited about their retirement prospects because they can access the same pension which was set up for them when they embarked on their first job? Will this make them more inclined to save more?
What are the product features and capabilities that will go around this single pot? How much investment will be needed from providers for such a solution?
And how will they offer that service in a way that is economically viable for the provider and delivers good outcomes for the consumer, while avoiding foreseeable harm?
It might be just me, but it feels as though the proposals create more questions than they answer. And I’ve not even raised the key questions around investment options and charges.
Let’s face it, a single pot isn’t a single pot that everyone will be signed up to. You will still need to be able to change single pot providers. How will employees engage with their pot for life? Will they get help growing it?
What happens when that pot for life is no longer right for them? Or if the company they worked at for their first job didn’t carry out the most effective due diligence on providers? What will prompt them to check if there could be a better solution out there? A change of job? A certain point in their career? A major life event?
In a world where many people are struggling financially now how do you motivate them to think about what they might need tomorrow?
Power to the people
In theory, under the new proposals consumers would have the power to ask their employer to pay into a pension product of their choice. This would put the consumer in control, for the first time, of where their workplace contributions are paid. If successful, this could stem the flow of new small pots and could reduce the need for so many pension transfers.
It could have the potential to strengthen the connection between the employees and their pension plans. Being empowered to make their own choice means a pension plan can then travel alongside individuals throughout their career. It belongs to them rather than their employer, which is a common misconception of the current arrangement.
If the appetite for engagement fails to materialise employees will continue in their existing plan which will, eventually according to the proposals, become the default as they change jobs.
In practice, would it all go as the government hopes or could it result in more unintended consequences? There are definitely challenges to consider.
It’s good for us to be talking about the issue and try to remove complexity wherever possible. But in doing so we don’t want to accidentally make things even more complicated.
As the government notes – “the original concept of a workplace pension was based on a model where an individual had a job for life.”
Now people may have several jobs throughout their working lives. Building up multiple pension pots is far from ideal. People may struggle to know what their total pension savings equates to.
But creating a new model is far from easy. Whatever happens, one thing’s for sure – advisers will always be there to help their clients navigate the pensions landscape.
Steve Owen is director of product management at Morningstar Wealth
