Chancellor Jeremy Hunt has announced a consultation on a new defined contribution ‘pot for life’ and plans to accelerate DC consolidation.

In his Autumn Statement on Wednesday, Hunt announced a series of game changing measures for the pensions sector, including a plan to give employees a legal right to require a new employer to pay into an existing pension account, similar to the Australian system. 

 

Hunt said: “By 2030, the majority of workplace DC savers will have their pension pots managed in schemes over £30bn, and by 2040 all local government pension funds will be invested in pools of £200bn or more.” 

 

He added: “I’ll support the establishment of investment vehicles for pension funds to use, including through the [Long-term Investment for Technology and Science] competition, a new growth fund via the British Business Bank, and opening the PPF as an investment vehicle for smaller DB pension schemes. I will also consult on giving savers a legal right to require a new employer to pay pension contributions into their existing pension pot if they choose, meaning people can move to having one pension pot for life.” 

 

 

The response by the Department for Work and Pensions to its consultation on small pots includes a new call for evidence on the future direction of workplace pensions addressing small pots, which closes on 24 January 2024. Among others, it proposes a central clearing house. 

 

In the foreword, new pensions minister Paul Maynard said: “Australia have successfully implemented a ‘stapling’ model, based on the idea of a pot for life. I want to understand what the benefits and considerations of this approach are.” 

 

He added that he also wants to see the collective DC market expand, saying “there may also be mutual benefits between the two, including how lifetime provider [sic] could help grow the CDC market. There will be questions for this including the right time to look at this and how we would go about phasing any future implementation”. 

 

Alongside the pot for life model, the government plans to introduce multiple default DC consolidators whereby “a small number of authorised schemes” will act as automated consolidators for DC pension pots worth less than £1,000. 

 
The Pensions and Lifetime Savings Association expressed concern about the pot for life proposal.
 
Nigel Peaple, director policy and advocacy, said: “We are very concerned at the proposal that the UK should move to a more individualised form of pension provision, here called the 'lifetime provider' model. Workplace pensions form the vast majority of private pension provision in the UK and our system of automatic enrolment is widely admired around the world. We are not aware of any evidence that moving to a 'lifetime provider' model would deliver better outcomes for members, but it might undermine the essential link between employers and workplace pensions and introduce higher costs and worst outcomes for some savers. 

 

The pot for life proposal could make employers feel even more detached from pensions than is already the case, agreed the Association of Member Nominated Trustees. 

 

“It will eventually undermine any sense that employers have a responsibility for pension quality. It will also require a new infrastructure/clearing house to be able to achieve it - which will take some time - so the whole change may take much longer than the other small pot proposals,” said AMNT co-chair Maggie Rodger. 

  

There would only be a payroll administration and cost issue left to the employer, “and so no incentive to support and encourage good retirement outcomes”, she believes, nor to continue with open DB schemes or develop CDC, except in the commercial space. It could become “simply a race to the minimum employer contributions and seen almost as an employment tax rate”.  

 
Others saw the positive side. Sam Underhill, a partner at consultancy Barnett Waddingham, welcomed the proposal to allow employees to take their pension account with them when they change job.  

 

“We think it’s a really good measure to put in place,” he said. 

 

However, he added that the practicalities could be “interesting” in terms of how employers will implement the new requirement. In Australia, people receive a form on joining a company where they put down which pension fund they want to receive contributions into, he said. If someone fails to declare this, the employer is required to contact the tax office, which can check if the person already has a superannuation account. 

 

“One of the big advantages of the Australian system is the tax office knows about everyone’s super pot,” explained Underhill.  

 

Each superannuation fund holds a tax file number they need to report to the tax office, an identifier system that the UK does not currently mandate. The UK’s reluctance to introduce unique national identification has also been a roadblock for projects like the pensions dashboards. While many people have a national insurance number, this is not systematically collected or mandated to be in the pensions sector. 

 

Underhill hopes the question of a unique ID will be addressed in the forthcoming consultation, expecting the government will be looking at the Australian system. 

 

From the member’s perspective, there could be benefits from having one pot instead of multiple accounts that can be lost track of and come with multiple costs, said Laurence Edmans, pensions lead of the Financial Inclusion Commission. 

 

“Together with the pensions dashboard, I would like to hope that having a clearer and more comprehensive picture of where someone’s pensions savings stand would be a significant step in dealing with what is the most pressing problem in DC, which is the inadequacy of most peoples’ provision for retirement,” he said. 

 

A major cause of that inadequacy, he argued, is that most people do not know their pension income will be inadequate. 

 

Edmans acknowledged there are potential downsides, warning that “people could get stuck in underperforming or poorly run schemes, because of the same forces that lead to most people never changing their bank account”. 

 

A pot for life would mean “pretty major rewiring of the systems” for employers and the pensions industry, Edmans noted, adding: “Frankly, this should not be any more beyond the ability of the industry and payroll providers, who will become even more key, than has been AE as it stands.” 

 

However, such a major change introduces the risk of mistakes, he remarked. 

 

It could also lead to relatively abrupt consolidation. “It is difficult to see it not resulting in a sharp reduction in the number of significantly sized DC product providers, and a big boost in the importance of brand. So it will be necessary to see that some of the excesses of promotion experienced in Australia are not repeated here,” he cautioned. 

 

Phil Brown, director of policy at master trust the People’s Pension, echoed these views, saying the chancellor’s package would bring the workplace pensions market closer to the retail banking market, with fewer, larger providers offering similar products. 

 

“This could be an attractive evolution for the market but it’s a long way off and the regulatory and practical challenges are huge,” said Brown. "The government’s thinking on the lifetime provider model is rightly at an exploratory stage and they acknowledge the potential difficulties. We think the proposal is worth a thorough exploration, although it would take years to implement." 

 

Also on DC, the chancellor said that by 2030, most DC members should be in schemes with £30bn or more in assets, which Underhill believes most large schemes will be anyway thanks to consolidation but also asset growth from auto-enrolment. In Australia, the regulator can order superannuation funds to wind up if they fail an annual performance test, so the question could arise if the Pensions Regulator should do the same in the UK. Underhill believes this could be the case in the long term, but it is “a long way off from where we are”. 

 

In a separate consultation response, the government will move ahead with asking that all schemes will offer a set of decumulation options by default that members will be opted into, saying that “DWP will at the earliest opportunity place duties on all trustees of occupational pension schemes to offer a range of different decumulation products and services to members at the point of access”. 

 

Martin Willis, who chairs the DC committee of the Society of Pension Professionals, believes this is “the final death knell for most home-grown DC schemes”, noting that few employer-sponsored schemes would have the appetite to provide this. 

 

 

Elsewhere, DC master trust regulation is coming into greater focus, and the Pensions Regulator will zero in on investment governance by “seeking an increased flow of more timely investment information... to closely review the changes to strategies and understand trends in investment, building a market-wide picture and allowing TPR to intervene to warn members at timely moments”. 

 

TPR could challenge how decisions are made as well as the expertise on trustee boards, and prompt schemes to consider their strategy if they are underperforming relative to others in the market. The government noted that the regulator and DWP will explore if legislative changes will need to be made for this “enhanced level of scrutiny”. 

 

Louise Davey, TPR’s interim director of regulatory policy, analysis and advice, said: “We want a master trust market increasingly focused on value, not just cost. Our evolved regulatory approach will put greater focus on investment governance, raise standards of trusteeship, build scale and expertise to facilitate investment in a diverse range of assets and ensure savers receive value.”

What are your thoughts on the government’s pension proposals?