Pensions: too many pots spoil the broth

Wondering what happened to a pension pot you contributed to whilst working for a previous employer is not an unusual concern.

It has long been recognised that employees having multiple, often small, pension pots from throughout their employment history adds complication, cost, and inefficiency for individuals and the UK pensions industry.

It’s also a significant barrier to engagement and individuals understanding the totality of their pensions savings. Just last month my colleague, Kate McIntosh, blogged on the multi-million-pound issue of ‘lost’ pension pots.

Autumn Statement 2023 - a 'pot for life'

One of several pensions-related announcements in Wednesday’s Autumn Statement was the ‘pot for life’ concept aimed at addressing the issue of ‘lost’ pots in the future. The government is seeking views on a ‘lifetime provider’ model. Under the proposals, savers would have the right to ask employers to pay contributions into one portable pension pot that moves with them from one job to the next, rather than starting a new pot each time they start a role with a new employer.

The aim of this would be a simpler system that reduces administration and the chance for lost pots, makes decision-making easier for members, and supports engagement.

This forms part of what the government calls its ‘long term vision for workplace pension saving in the UK’ to improve outcomes for savers. In considering this proposal, the government is taking note of the experience of a number of countries that have adopted a lifetime provider model, including Australia.

This would be a significant shift from the current position in the UK. Many will think that this is just what is needed – a complete shake up to help solve an issue that never seems to go away, despite a lot of work in the industry.

What are the implications of a 'pot for life'?

As ever, the devil will be in the detail. If these changes were to come in, there would need to be careful consideration around implementation time, resource, regulation, and administration to name a few.

One key aspect that comes to mind is that currently, auto-enrolment is an obligation of the employer. The ‘pot for life’ idea could shift the onus towards the employee. This raises questions such as:

• What support will there be for employees choosing the scheme?
• With active involvement in the workplace pension scheme reduced, will employers lose the impetus to identify the most suitable pension product for their workforce and negotiate terms, investment funds, and charges?
• How will employers and payroll providers co-ordinate contributions to multiple schemes across the workforce?

The call for evidence document also suggests that there could be exemptions from the lifetime provider model where the current employer provides a better offering than the lifetime provider (such as a defined benefit scheme). There are likely to be circumstances where identifying which one is the ‘better scheme’ is not easy.

The government recognises that there would be many challenges to work through in order to make this feasible.

It will be interesting to see what comes from the call for evidence, which closes on 24 January 2024.

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