Pot for life could threaten auto-enrolment success, warns ABI

Employer survey shows companies are concerned about the potential negative impact on staff pension outcomes.

The government risks throwing away the gains from auto-enrolment if it proceeds with its lifetime provider concept, according to the Association of British Insurers (ABI).

The trade body has warned that, while government proposals to introduce a lifetime provider model may help to tackle the growing number of small pension pots, it may also undermine the success of automatic enrolment.

It said the plans could fundamentally change the role of the employer in pension savings and could have a negative impact on outcomes for savers.

A report from the association surveyed more than 1,000 employers on how they would respond to the reforms. Three in five (59%) employers said they would be concerned about staff making poor decisions on pension savings under the proposed ‘pot for life’ model.

Yvonne Braun, director of long-term savings policy at the ABI, said: “Tackling the challenge of the rapidly growing number of small, inactive pension pots is vital so that it’s easier for people to keep track of their money.

“However, automatic enrolment through the workplace was primarily set up to help those who were not saving into a pension, many of whom were lower paid people, and we must not reverse its success. As this evidence shows, member choice would deliver few benefits, but risk throwing away the gains from auto-enrolment.

“Pensions dashboards will bring key improvements in data quality which could help to make more efficient, cheaper pension transfers a universal reality. It is important that this work is completed, and the impact understood, before any further reforms are added to the mix.”

Cost concerns
Chancellor Jeremy Hunt has tasked government officials with exploring two options for the lifetime provider concept: member choice and pot for life.

However, the ABI’s 30-page report, entitled ‘Understanding the impact of pot for life’, suggests that savers staying put could miss out.

Under auto-enrolment, charges mainly take the form of a small percentage of the value of a saver’s pension pot. Because it is a percentage, this means that people with smaller pension pots benefit from lower charges than those with larger pots. Firms recoup the lower charges for small pots by charging more for larger pots – known as cross-subsidisation.

However, the ABI’s research, which was conducted by WPI Economics, found that under member choice, people would be encouraged to switch providers and firms – creating a retail or individualised pricing model similar to banks. With this model, pension firms were likely to seek to attract savers with bigger pots out of workplace pension schemes, and this would leave smaller pension pots behind, the association said.

The ABI found that, based on analysis of international and UK markets, those with lower savings could end up with lower performing defaults, while also potentially being hit with increased charges as they would lose the cross-subsidies from larger pots.

The report also warned this could cause existing inequalities in pensions to deepen further, as it would be more likely to impact those who are younger, on lower incomes, women, and people from ethnic minority backgrounds.

The role of the employer
The ABI’s research also suggested a fundamental shift in the role of the employer under the lifetime provider concept.

Currently, employers play a significant role in workplace defined contribution (DC) provision as they are responsible for selecting an appropriate pension provider that meets their employees’ needs. However, if individual employees are empowered to choose and switch providers, the onus would shift from employers securing the best deal for their employees, to individuals taking more control of their pension pot.

The ABI’s survey found that 65% of employers said it would be more difficult to assess the quality and value of a pension scheme for employees under the proposed reforms. More than half (57%) said they would take less interest in the quality of the scheme chosen for employees who remain with their workplace provider.

In addition, 62% of employers expressed concerns that the reforms would lead to their employees experiencing poorer pension outcomes, compared to just 10% who disagreed that there would be a negative impact.

James Carter, head of platform product policy at Fidelity International, agreed that the pot-for-life model could “radically change the UK pensions market and unwind much of this progress” since auto-enrolment.

Fidelity’s own survey of savers found that 65% liked the idea of choice, but were most likely to remain with their employer’s chosen provider. Half of respondents said they would feel concerned about having responsibility for selecting their workplace pension provider.

“We need to stay focused on the successful delivery of other initiatives, such as the development of pensions dashboards, already in flight, and turn soonest attention to increasing the levels of pension contributions being made,” Carter added.