As children are reminded on a regular basis, actions often have consequences. And, as many end up learning, it’s not always obvious what those consequences are going to be.

This summarises the situation that the UK pensions system finds itself in today, just over a decade after auto-enrolment was first introduced to address shortfalls in workplace pension saving.

While not perfect, it is acknowledged that the action of introducing this system has largely been a success. There have, however, been unintended consequences. Most notably, by establishing the default conditions for employees to begin saving into a new workplace pension when they change job, auto-enrolment has directly contributed to more pension ‘pots’ being created.

In the 2023 Autumn Statement, Chancellor Jeremy Hunt announced that the government would be consulting on the possibility of a lifetime provider approach to pensions to address this situation. Here, we look at what’s on the table and what it would mean for employers and employees.

What’s the issue?

In today’s era of job hoppers and portfolio careers, workers are more likely to change roles with far higher frequency than they once were. The most common length of service is now between two and five years, putting paid to the idea of a job for life.

Each time an individual starts a new role, they are likely to trigger the creation of a new workplace pension as their employer must fulfil auto-enrolment obligations. This increases the likelihood that employees will accumulate a number of small pension pots over the course of their working life, and this can be a source of potential confusion when it comes to planning for retirement.

What is the government doing?

 In recognition of what he described as “the long-standing problem of small pot pensions”, Chancellor Hunt has requested a ‘call for evidence’ on the pros and cons of introducing a lifetime provider model.

In essence, this would allow an individual to choose to have contributions paid into an existing pension scheme when they changed job, rather than being automatically enrolled into the pension scheme provided by their new employer. It would, said the Chancellor, give individuals “greater agency and control over their pension”.

How would it work?

The details of how any possible new system would work are yet to be put forward, but there are two key concepts involved: pot for life and member choice.

Pot for life is based on the idea that your first workplace pension scheme follows you throughout your career, with contributions automatically being directed to this pot unless an individual opts out. Member choice, meanwhile, would simply give employees the right to request that a new employer pays pension contributions into a designated pot.

In theory, individuals would treat their pension in much the same way as their bank account, with the ability to switch providers.

For employers, changing to a pot for life model would effectively necessitate making payments to multiple providers rather than just one (as is the case now) – although it has been suggested that such a complex process would be managed via a clearing house to minimise the burden.

What has been the reaction?

Supporters of the pot for life concept see it as the answer to an inefficient system where multiple small pots proliferate. Research has also shown that the majority of savers think it would be a positive change (53%) and expect it would drive higher levels of engagement with their pension saving (54%).

At the same time, there are those who are worried about the consequences of moving to a lifetime provider model. With greater ability to switch providers, critics say there is a risk that savers could find themselves in lower performing schemes with higher fees. Concerns that savers could secure worse outcomes have been echoed by employers, who also expressed fears over a higher admin burden and increased payroll costs.

Currently, companies have a responsibility to secure optimal pension benefits for their employees as a whole and a lifetime provider approach would represent a fundamental shift to this role. This point is underlined in a survey commissioned by the Association of British Insurers, where more than half (57%) of employers said they would take less interest in the quality of the scheme that they would choose for the employees who remain with their workplace provider.

Can lessons be learned from elsewhere?

In the Autumn Statement, the Chancellor referenced the success of the ‘stapling’ model that has been implemented in Australia – so called because an employee is effectively ‘stapled’ to their first workplace pension scheme for life (unless they choose an alternative). The government has sought information and advice from experts involved in Australian Superannuation as part of the current consultation.

Meanwhile, analysis of activity among savers in Mexico revealed that 40% of consumers who switched schemes after a member choice model was introduced found themselves with lower returns and higher fees.

What happens next?

The ‘call for evidence’ issued by the Chancellor on 22 November 2023 officially closed on 24 January. The government is now in the process of reviewing opinions, undertaking analysis and exploring options, with no date set for when it will publish its consultation response.

If change is forthcoming, it will be far from a ‘quick fix’ to the small-pot pension problem, requiring significant and extensive re-engineering of the current pension system. In the meantime, employers will remain focused on driving engagement and delivering valuable benefits to employees through the current workplace pensions model.

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