It is ironic that the pension solution that the Government has arrived on to make “sweeping changes” to the workplace pension system is at the furthest remove from the high finance of the Mansion House Compact.

I challenge even the experts to differentiate the workplace pensions on offer to employers by their commitment to long term capital.

The proposal for individuals to have a pension paid from a “pot for life”, depends on the creation of a single pot, rather than a number of little pots that are managed independently and stem from each employment having a different workplace pension ,

In Australia, the process of building a pot for life is known as “stapling”, a word that is counter intuitive but is intended to give an idea of a single statement created through attaching one statement to another. For statement read pot.

Here is how Australian Super describes “stapling”

The introduction of super stapling means working Australians will be attached to one super fund for life unless they choose otherwise. The measure aims to reduce the number of super accounts people may acquire throughout their working life.

The introduction of super stapling makes it even more important for employees to actively choose a super fund best suited to their circumstances and needs. Making informed choices about super reduces the potential to be ‘stapled’ to a fund that may not lead to the best retirement outcome.

Australian Super produces an infographic that shows how the saver gets involved in choosing their workplace pension

In this model, the employer continues to have to have a “default fund” – a workplace pension (Super) which acts as the longstop. It is only after an employee shows no history of workplace pensions , shown no interest in choosing a fund and has avoided being “stipulated” a fund, that the employer’s “default fund” is used to set  up the workplace pension.  (excuse me the confusing jargon – ” default fund/workplace pension/Super” are the same thing.

What will this mean?

I will revert to a tried and tested system of categorisation of savers. “Bunnies, bears and badgers”  (categories courtesy of Emma Douglas)

A bunny (70% of savers) has no interest in making an active choice and elects to have choices made for her/him.

A bear is curious, makes some inquiries but decides that making a decision is too hard and ends up having choices made for her/him

A badger is both curious and self confident and makes an active decision as to how to invest , this decision may be the default fund – but it’s an informed choice. Badgers are also confident enough to opt-out,

Since we know that over 90% of decisions around workplace pension, result in people staying “in” , my analysis suggests that the number of people who make an active choice as to how they invest is mighty small.

In order for “personal choice” to happen, there is going to have to be a major cultural change in the way people think about their workplace pension. This is why the Treasury think about “pot for life” as a sweeping change.

If the Treasury are right and people start talking about “my workplace pension” , like “our house” or even “my bank account”, then something culturally significant will have happened.

What is the operational downside?

It appears there is already considerable doubt being cast over whether a pot for life system could work. The FT’s Lex column runs this headline today. The City is doing very nicely out of auto-enrolment at the moment- why upset the apple cart?

There’s no doubt that to get to a “pot for life” system, there is going to have to be some more work for employers enrolling staff at the start of their  career. The process outlined above is going to involve employees remembering their previous workplace pension for a start. Because we have no pension dashboard, there is no easy way to find out what you have. So I can see a lot of suspense accounts being set up pending delivery of pension information from staff who don’t know and don’t care.

There is then the complication of whether a pension scheme is or isn’t a workplace pension. Pension Bee isn’t, Penfold is. Vantage isn’t, Hargreaves Lansdown is. I suspect that a “pot for life” solution would make it a lot more attractive for non workplace SIPPs to sign up to be workplace schemes (with the increased governance of IGCs etc).

Finally , there is the job of directing contributions to workplace pensions (and not paying money to pensions which don’t qualify). All of this can be established using existing technology. As has been regularly mentioned, payroll links to many banks, why not many pensions?

The downside of a pot for life system is mainly about anticipated operational failure, which is not a great way to look at solving a problem like pot proliferation. That said, clearing pension contributions may present a challenge to payrolls who are still struggling to set up true straight through processing with the majority of providers.

What is the danger to consumers?

The DWP has previously consulted on its preferred solution for creating a smaller number of pots from the heritage of auto-enrolment so far. The DWP want  “default consolidators” to sweep up small pots (lower than £1,000) on a carousel basis. This means that people who don’t make the choice to consolidate their pot will end up in funds that the Government approves of as being “good enough”. This could be a long list or a short list or it could just be Nest (probably the solution a Labour Government would prefer.

If this is run in parallel with “pot for life” going forward, the default consolidators would quickly own the market of people who weren’t making active choices. People would need to opt-out of the clutches of the default consolidators to have their own “workplace pensions”. This is where a lot of paternalistic people will have problems. Steve Webb has already called “pot for life” a bad idea on the basis that it will consign those who make no choice (bunnies)  to rubbish pensions with high charges while those who are capable of making informed choices (the bears and badgers) will escape to high quality low charged alternatives.

I don’t necessarily buy that. The propensity of the financially sophisticated to waste their time and money on nonsense SIPPs which deliver little value for money does not suggest that we choose well, or even employ advisers who choose well for us. I will put myself at odds with Steve Webb, Mick McAteer and I suspect Jo Cumbo, but I don’t see the pot for life system as a threat to consumers, so long as the operational cost does not harm the development of workplace pensions in other ways (for instance stunt the nascent decumulation progress).

What is the upside?

If I was delivering the idea of Pot for Life, I would sell it on five features and benefits

1. It makes a pension a matter of personal ownership which will benefit consumers by encouraging more saving and better decision making over how the pension is paid
2. It dramatically reduces the problem of small pots which is making workplace pensions more expensive to run and frustrating consumers who find it hard to consolidate
3. It distracts attention away from the Government’s disastrous mismanagement of the pension dashboards project, giving consumers some hope that they won’t lose pensions in the future
4. It reduces the risk to employers of being accountable for the retirement outcomes of workplace pensions.
5. It encourages the workplace pension behemoths to invest in long term capital knowing they have the financial strength to do so.

A consolidated workplace pension industry becomes more manageable to regulate and looks easier to manage towards preferred outcomes (see recent speeches by Nausicaa Delfas and blogs by Louise Davey on the need to turn pots to pensions).

The automatic consolidation of pension pots, going forward or backwards, will not happen for some years and may not happen at all. But it has been under discussion for at least as long as I have been writing this blog (15 years next January) and I can remember submitting a pot consolidation model – very much like this, – for Eagle Star as part of the 1998 stakeholder pension consultation.

If, as I now expect, the idea of the pot for life (with or without Default Consolidators) is launched in today’s Autumn Statement, it will be the legacy that Laura Trott will leave pension.

I have no doubt she is behind this. Good for her.