The Association of British Insurers (ABI) has warned the Government that proposals to introduce lifetime ‘member choice’ pension pots risk undermining the success of automatic enrolment.
The proposals could fundamentally alter the role of the employer and damage outcomes for savers, the provider trade body has warned.
Under the ‘member choice’ lifetime model, being floated by the Government, employees could ask their employers to pay their contributions into a portable pension pot of their choice rather than joining an auto-enrolment scheme.
The ‘pension pot for life’ model could, therefore, mean that employees would stay with the first pension scheme they joined at the beginning of their career rather than taking their pension with them as they moved jobs.
Thanks to auto-enrolment employers now play a significant role in workplace pension saving but the ABI warned this role could be diminished under the Government’s proposed reforms.
The ABI and WPI Economics surveyed over a thousand employers and 65% said it would be more difficult to assess the quality and value of a pension scheme for employees under the proposed reforms.
Over half (57%) said they would take less interest in the quality of a ‘member choice’ scheme than they would for the employees who remained with their workplace provider.
The focus on switching poses a further challenge, as WPI Economics estimated that just 5% – 8% of pension savers will exercise choice in the initial years of the reforms, based on evidence from other markets.
Over half of employers (59%) said that they would worry that their staff would make bad pensions decisions if they had to choose for themselves. Likewise, 62% of employers expressed concerns that the reforms would lead to their employees facing worse pension outcomes compared to just 10% who disagreed that there would be a negative impact.
The ABI also shared concerns that the reforms were likely to create a significant admin burden on employers.
Some 63% of employers said that they were worried the proposed reforms would increase their payroll provider costs, while 28% estimated that the reforms will require an additional five hours of staff time per month. Modelling based on the findings suggests that this admin burden could cost £550m per year across the economy.
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The ABI also expressed concerns that lifetime provider models could widen existing pension gaps.
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 are likely to seek to attract savers with bigger pots out of workplace pension schemes, leaving smaller pension pots behind, the ABI says.
Based on analysis of international and UK markets by the ABI, those with lower savings could end up in lower performing default funds while also potentially being hit with increased charges as they would lose the cross-subsidies from larger pots.
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.”
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