Under the lens - Workplace pensions and the government's "pot for life" proposition

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In his Autumn Statement, in November 2023, chancellor Jeremy Hunt unveiled plans to reform workplace pensions – namely, a proposal to introduce a “pension pot for life”.

Rather than having to sign up to a new workplace pension whenever someone starts a new job, the scheme would allow employees to ask their new employer to contribute to an existing pension pot.

The shake-up aims to tackle the problem of millions of small pension pots being generated – and often forgotten about – as people change jobs through their working lives.

By giving savers a single pension pot that could move with them throughout their working life, the hope is that the proposed “lifetime provider” model will simplify the market.

The Treasury has also said it would provide savers with “greater agency and control over their pension”.

Estimates suggest that UK workers have lost track of around 1.6 million workplace pensions

Many workers fail to keep tabs on old workplace pensions, which means that billions of pounds of retirement savings have been misplaced or forgotten about.

Indeed, data from the Association of British Insurers (ABI) suggest that, collectively, people have “lost” around £19.4 billion in retirement savings[1].

One of the biggest reasons pension pots are “lost” is because when an employee moves jobs, they end their membership of their most recent company pension scheme and simply sign up – through auto-enrolment – to their new workplace scheme.

Though workplace pension pots can usually be transferred to their new workplace pension scheme, in many cases workers fail to do this and end up leaving the money where it is. Eventually, many people then proceed to forget all about past pension pots.

“Ending the proliferation of deferred small pots” is the primary reason that the government has proposed introducing a “pot for life”.

Minister for pensions, Paul Maynard MP is leading the consultation on the introduction of this new “long-term vision for workplace pension saving in the UK” [2].

The proposed framework for changes to workplace pensions

The government delivery group steering the proposed changes and consultation are considering:

  • The creation of a central clearing house to act as a central point informing schemes where to transfer a members’ eligible deferred pot
  • The idea that a pot would be eligible for automatic consolidation 12 months after the last contribution was made into the pot
  • Setting a maximum pot size limit for automatic consolidation – initially set at £1,000 but this would be reviewed regularly by the Secretary of State
  • Applying no minimum pot value for a pot to be eligible for automatic consolidation
  • How the change would be implemented – the suggestion being that instead of mandating participation, they would encourage schemes to take part where possible.

The consultation attracted responses from:

  • 20 pensions schemes providers
  • 20 pensions industry professionals/trade representatives
  • 4 law firms specialising in pensions law
  • 7 financial service providers
  • 2 employer/employee representatives
  • 2 consumer groups.

Respondents were broadly supportive of the proposals

The creation of a central clearing house

When asked about the suggestion of a central clearing house, respondents felt that interacting with a single organisation would make automated processes simpler for providers and members. It was also felt that a single clearing house potentially removed the risk of multiple providers contacting members about their various different pension pots.

However, there was some concern over the security of a single registry due to the threat of a data breach, as it could become the target of a cyber-attack.

Automatic consolidation

The consultation set out two options as potential approaches to allocate members to a default consolidation in situations where a member did not make an active choice:

Option A: Allocate all small pots between the providers who meet the criteria to be a consolidator at a level proportionate to their market share.

Option B: Given the likelihood that a member will have a deferred pot already with a consolidator scheme, this scheme would be allocated as the members consolidator scheme. In cases where a member has pots with multiple schemes that are authorised consolidators, their deferred pots could be allocated to the consolidator scheme that holds their largest deferred pot.

Respondents agreed that Option B was preferable to Option A. Option A was criticised for a range of reasons, including:

  • The risk of creating an uncompetitive default consolidator market
  • Bedding in existing market share
  • Restricting the ability of new entrants to the market
  • Removing incentives for smaller providers to grow their share of consolidated pots.

In addition, respondents were concerned that this approach could unfairly benefit some schemes and not comply with competition law, and also require regular monitoring, which could be challenging to implement.

M&G said: “We believe that a simple carousel system whereby small pots are divided evenly between all registered consolidators unless the member makes an active decision would be a better option – allowing for new market entrants and fair competition.”

How the change would be implemented

When it came to the proposition not to mandate schemes to undertake same-scheme consolidation, but encouraging adoption where possible, a large majority of responses agreed with the proposal.

Not mandating same-scheme consolidation immediately was welcome, with respondents noting potential legislative and operational barriers.

There are also some cases where employees have multiple pots with the same provider for good reasons. For example, they may have different features, guarantees, or charges and it may not be possible to transfer without losing such benefits.

What next?

While the government consultation is still ongoing, the “Government response to ending the proliferation of deferred small pots” report suggests that proposals may be ready for ministers’ “consideration and decisions” by late 2024.

For the time being, it’s business as usual.

We will keep you updated on any developments. So, you can be reassured that you’ll be kept abreast of this and other regulatory changes, allowing you time to prepare for them.

Get in touch

If you’d like to discuss how the introduction of a pot for life might affect your firm or you’d like to provide pension support or education for your employees, please get in touch.

Email info@aspirafp.co.uk or call us on 0800 048 0150.

Please note

The information contained in this article is based on the opinion of Aspira and does not constitute financial advice or a recommendation for any investment or retirement strategy.

Workplace pensions are regulated by The Pension Regulator.

[1] https://www.abi.org.uk/news/news-articles/2022/10/call-on-uk-retirement-savers-to-take-action-on-26.6bn-in-lost-pensions/

[2] https://www.gov.uk/government/consultations/ending-the-proliferation-of-deferred-small-pension-pots/outcome/government-response-to-ending-the-proliferation-of-deferred-small-pots#annex-c-priority-areas-for-the-delivery-group-to-consider

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