‘Pot for life’ proposals risk undermining high quality workplace pension provision – Laura Myers, LCP
Pensions & benefits DC pensions
Commenting on proposals announced in the Autumn Statement to allow workers to divert workplace pension contributions to a scheme of their choice, Laura Myers, Head of DC and Financial Wellbeing at LCP said:
“The current system delivers high quality and low-cost workplace pensions to millions of workers, and these proposals risk undermining that system. At present, employers act on behalf of their entire workforce, benefiting from competition from pension providers, and negotiating a good deal for high and low earners alike. In a ‘pot for life’ system, the pensions industry will inevitably seek to ‘cherry pick’ high earners, whilst ordinary savers get left behind. Inertia will remain a powerful force, with many workers, who can’t afford expensive financial advice, simply staying where they are but their workplace scheme will now be less attractive to providers who may well increase charges to make up for the lost contributions of high earners. In addition, employers may reconsider if spending money on their pension scheme is a good investment if many of those who may benefit are no longer current employees. If this happens then a large number of pension savers will lose out.
"If individuals have total freedom where to direct their pension contributions, they will also be exposed to much greater risk of making sub-optimal decisions. There will be a growth in the number of organisations offering to be the home of workers’ pensions via glossy marketing campaigns but not necessarily offering best value for savers. There is also the ever-present risk of workers falling foul of illegal scams and this will need to be strictly regulated to avoid this being a field day for scammers.
"If change is needed to deal with the problem of small pension pots as workers change jobs, alternative ideas such as ‘pot follows member’ could help to avoid this problem, but without undermining the foundations of the current system of workplace pension provision”.