Open pensions make Pot-for-Life redundant

oked at proposals from the Australian Government to test  Super pension schemes for the value we were giving for member’s money. This idea is not being universally well received in the UK, David Harris described it as politically inspired tosh. He probably thinks the same of the DWP’s consultation on improving DC member outcomes which calls for small DC schemes to throw in the towel if they don’t think they’re delivering VFM.

I expect that we are heading for a similar difference of opinion on Australia’s plan to see workers tied to their super fund, meaning employers will pay into existing accounts each time someone gets a new job, rather than risk creating multiple accounts that can leave balances eroded by fees.

Workers currently pay $30 billion a year in superannuation fees.

About 4.4 million people currently hold 6 million accounts, totalling $450 million in unnecessary fees. The federal government estimates there will be 2.1 million fewer accounts created over 10 years, saving $2.8 billion for workers. Earners can still switch super account as they like.

But where is the employer in this?

It is now 5 years since I wrote in CityWire that pot follows member was a dead duck. I haven’t changed my view. My view then was that pot follows member took employers out of the AE value chain, that remains my view.

What happened in the UK with the staging auto-enrolment was two miracles for the price of one. Firstly, people trusted the changes to their take home were for their good and stayed in. Secondly employers found a way to comply with the AE regulations on contributions.

The two are almost certainly linked, employees respected the idea of being in a workplace pension because it was implemented through the one financial portal we all trust – payroll. Similarly employers found the potential calamity of AE compliance was averted through the efforts of their payroll function. The pay-off to employers was that even if governance of the workplace pension was outsourced to an insurer or master trust, there was still a direct link between the employer and the provider. That link was and is – payroll. So long as payroll is at the heart of the AE process, workplace pensions continue to be perceived as company pensions.

There’s a question as to whether this link is broken if the only link between payroll and providers is a hub that allows employer contributions to be paid to any authorised workplace pension.

It certainly reduces the role of any employer governance committee as less and less employees contribute to the employer’s designated workplace pension. There comes a point where the concept of a pension as an employee benefit is so diluted that pension contributions simply become an extension of the national insurance bill.

The employer loses but member and providers win

Set against this emasculation of the power of employers, the improvements to the finances of both providers and members. The pot for life concept means a reduction in small pots and an improvement in the efficiency of providers whose “persistency” ratios improve dramatically. It makes for individuals with “pots for life”, rather than the pot per employment which causes such problems at retirement.

Again member and provider interests are conflated as provider cost savings can be passed on to members and members need only deal with one provider when they want their money – to the great relief of small pot “claims handlers”.

Meanwhile, until some electronic passport is invented that ensures that employers know how to instruct their distribution hub as to the destination of money, the administration of a pot for life (or pot follows member) system keeps most of the operational risk with the employer.

We see with the Pensions Dashboard, how hard it is to achieve common data standards, the implementation of the Australian pot for life system looks many years away, even if it gains support from all stakeholders. Employers look unlikely to voluntarily co-operate unless some incentive is provided for them to adopt a hub-based contribution distribution model.

Open pensions – a better model

There are better ways of solving problems with small pots and they involve the use of data analysis both by members and providers. It is clear who winners and losers will be from AE charging structures. Smart structures like NOW’s , protected the provider from the cost of small pots by charging small pots for being small.

Organizations which went with a mono-charge such as People’s Pension and Smart Pension have moved to an AMC +fixed fee model to protect themselves from the growing costs of small pot administration and the levies small pots attract. These costs hit the  true heroes of AE hardest.

I only exclude Nest from this analysis as they are feather-bedded on costs by its DWP loan. Nest’s small pot costs dwarf all others and the loan should not hide the fact that small pots are pushing out the break even point for Nest (to no good end).

By operating API links between large providers, it is possible for pots to pass from provider to provider when there is recognition that a member record is duplicated across two schemes. A simple interchange of pots between co-operating providers could mean that consolidation occurred without member consent on all pots below a certain size – where providers signed up to such an interchange.

Intelligent systems identifying consolidation opportunities , combined with API technology allowing data and contributions to flow openly between pensions seems a much better way of solving a problem than by risking alienating employers and payrolls, on which so much of AE’s success depends.


So while I am for the Australian idea of “naming and shaming” underperforming providers, I am against the pot for life proposals being implemented next summer in Oz , from coming to these shores.

We had our chance to implement such a system at the outset of auto-enrolment and I remember touting Superchoice to the market then. That was over ten years ago and technology has moved on.

We can by-pass the cul-de-sac of the pot for life and create a system of auto-consolidation for extremely small pots. Meanwhile we need to keep pushing for easier ways for people to bring bigger pots together, but that is a subject for another blog.

About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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1 Response to Open pensions make Pot-for-Life redundant

  1. Martin T says:

    CDC + compulsory AE membership + central regulated funds + pot follows member hub …
    … = SERPS II

    Is that the logical end point of our direction of travel?

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