Tom Mcphail, myself and Steve Bee are three pension people suggesting that in time people will be able to ask employers to pay into the pension they choose rather than the pension chooses for them. You can read about this in this article.
I know very well, that allowing “self-direction” has been a nightmare for payroll, a turnkey for scammers and a “value-diluter” for employers and providers trying to provide an employer-centric workplace pension. But those arguments are historic and can be countered by “better technology – greater consumer protection and a new employer relationship with pensions resulting from automatic-enrolment’.
I will touch upon these matters but I don’t want to use our failures in the past or counter with a “why things are different now” approach. I’d rather take this back to what pensions are about , which is not to make a living for financial advisers, pension providers or even the payroll industry. Pensions are about giving people money in later life – their money.
Reason one – it is their money
The big difference between a funded workplace pension and the state second pension, was that you have ownership rights on your workplace pension. You can choose how it is invested, how much goes into it and how money comes out of it. That is seen as an advantage and I think most of us like the freedom and choice and are prepared to pay for it it in terms of the decreased efficiency funding brings.
To tell people that they can’t choose who manages their money and put this matter in the hands of an employer, seems arbitrary. It makes sense to allow those few people who want control of their pension to have control- it is their money.
Reason two-it could be a lot of money.
Right now, the average account balance of a workplace pension is a few hundred pounds, in five years time the average workplace pension will be worth more than the average family car and people will start regarding ownership of the pension pot as valuable.
Despite our rights to the state pension currently being valued at £200k per person, because we have no rights of ownership – other than to a fixed income stream in retirement, no one counts the state pension as “personal wealth’, the same will not be said of the workplace pension pot (s).
Indeed the pension dashboard, when it arrives, is likely to show people not just the amount they have in their workplace pension, but their rights to do with this money, what they will.
Reason three- some people think they know better than their bosses.
Most of us are happy to allow other people to control where our money is invested and trust them to negotiate a good deal for us on how much we pay for the management of our money.
However a certain number of people are not and want control of their money. We have a principal of freedom and choice in our pension system. This principal could be extended to allow individuals who value control of their pension to exercise control and self-direct the pension provider of their choice.
Reason four – some people do know more than their bosses
I have personal experience of employer decision making on workplace pensions and would agree with the OFT
Most buyers of workplace pensions are now employees appointed by employers who are unskilled and unmotivated to become skilled purchasers.
It does not take much to become a “skilled buyer” when the bar is set so low.
Reason five ; past performance is no guide to the future!
We should not suppose that because self-selection has failed in the past, it will fail in the future. Nor should we say that because pot has not followed members to date, it never will.
If technology is the barrier, then let’s find technology solutions – as they have been found in Australia (for instance).
Providers may feel nervous at the thought that deals done with employers may be diluted in value by the migratory patterns of sophisticated investors arriving and leaving with other provider’s pensions. However these cuckoos in the NEST are unlikely to become the norm, and even if they were (the norm) the net impact of a diaspora of pots would only be challenging to failing providers.
The current system where employees are bound into a contract chosen by their employer is anti-competitive and market pressure will require a more sophisticated relationship between members and their pots.
So there you have it;-
It is our money
It will be a lot of money
Some of us think we know better than our bosses
Many of us will be right!
The past is no guide to the future (change is inevitable)
With or without you!
Let’s be clear, no one is suggesting that self-direction is coming today – or even tomorrow.I suspect that it won’t be looked at seriously by the UK Government for five years.
So you may consider reading this blog , a total waste of time
Then again, you may have just read the earliest exposition of an argument that in five years time you are thoroughly sick of.
Either way, there’s no reason why we can’t have this debate today – with or without you!
Thanks for reading.