I enjoyed reading Ian Macintyre’s blog ” Pot for Life – making it work“, you can too – via the link. Ian is someone who thinks a lot about connectivity and understands the connection between pension dashboards and the “stapling” of our pension pots over a lifetime of saving.
If I can criticise his position , it is taking too strong a view on personal choice. I suspect that while “pot for life” is being sold on it empowering savers to engage in what they’re saving in, in practice – savers will continue to be passive and accept what happens to them.
In this blog I pour cold water on the idea that pot for life will reshape private pension saving.
- I don’t think it will offer opportunities to non-workplace pensions
- I don’t think it will radically undermine the employer’s role in workplace pensions
- I don’t think it will work (unless we have “animal spirits” in regulation).
I think it is a convenient distraction from a Government that has screwed up on pension dashboards.
The carousel of consolidation
As I understand it, the pot for life compliments the “carousel of consolidation” where your past pots are loaded onto a baggage travelator and dropped off randomly according to a “you next” queuing system, organised by the Government. In short, if you don’t consolidate yourself, you will find yourself in a pension scheme managed by someone you didn’t choose in a way you have know knowledge or understanding of.
The carousel of consolidation is the Government’s answer to what has gone and a Labour Government might be even more prescriptive and tick all pots into Nest – those are the kind of “options” , I hear being talked about. The carousel is no nearer happening today , than it was when it was mooted in July.
Going forward , personal choice is still am option not a necessity. You will enter the workplace pension system via a gateway chosen not by you , but by the first employer who auto-enrols you. Of course – under pot for life – you have the right to decide against that option and your employer would be obliged to contract either directly with your choice or use a hub – from which your choice is one of the spokes.
And don’t think you can choose any pension, the choice you make is limited to providers approved to be workplace pensions. That means they must be able to operate the disclosures relating to auto-enrolment and manage opt-outs, they must have an IGC and they must maintain their status through their regulator. Many large SIPPs , including SJP and Pension Bee do not operate workplace pensions (for external employers).
Pot for life will not open the door to non-workplace pensions, if non workplace SIPPs chose not to play during staging, they aren’t going to start now
Hotel California
And please don’t think that pot for life will be universal. In its consultation documents , the Government has already made it clear that it will protect all kinds of pension schemes that can prove they are special.
We anticipate the need for exemptions to the lifetime provider model in circumstances where an employer provides a better offering than the lifetime provider. This would include defined benefit schemes and may include some defined contribution or collective defined contribution single-employer trusts, Master Trusts or Group Personal Pension Schemes that have more generous features in the default than the lifetime provider – for example, a protected pension age, significantly higher than minimum employer contribution levels or tax-free lump-sum. In those circumstances we would want to continue to encourage employers to be more generous to their employees, and so allow them to pay contributions into their own scheme
Which is a charter for any employer or the funder of any master trust choosing to protect their scheme, to ring-fence it from pots being ripped from it and stapled to another. We’ve seen such protectionism in action with People’s promotion of their “protected retirement age” and even more bizarrely, Nest’s inability to build a “transfer out” facility. Such practices are known as “Hotel California”
In short, unless the lawyers are excluded from the party, pot for life will become another playground for the “red and amber flag” brigade who find a legal reason to block the greater good and trumpet “scam” in the face of the saver trying to make sense of their pensions and pots.
Employers have no reason to make pot for life work, it is an operational disaster waiting to happen. Any employer who has invested in keeping its own workplace pension is not going to give up on that investment lightly.
Employer schemes and master trusts could make pot for life a damp squib.
The safest graveyard
If legislators and regulators choose to operate a Hotel California system , if the barriers to being a workplace pension remain high and we continue to question the behaviour of savers trying to make sense of what they’ve saved, the expectations of the SIPP industry for “pot for life” to be a market free-for- all , should be limited.
To quote Ben Afolami, pot for life requires a different kind of regulation “Animal spirits need to be there, we need to innovate, we need to drive growth and initiative”.
Well sort of. Actually we are not in love with pot consolidation right now and the animal spirits will need to breathe through the entire DC pension system. As Ian McIntyre puts it;-
The whole basis for ‘pot for life’ really is that choice and the market should mean that pensions will, through competition, provide good value for members. For this to work it should be as easy as possible for a customer to move from one pension to another.
And frankly as an industry we totally suck at this.
We demand letters of authority before we share the data needed to make the decision. We make firms do a lot of checks before they release the money. We have processes that are manual and the same as we had in the 80s. We make people seek financial advice or go to Pensionwise in order to move their pensions… The list goes on.
That’s not good enough now, and it certainly cannot be good enough for the sort of pensions market that ‘pot for life’ is designed to create. People should be able to move pensions provider with a minimum of fuss and with the money moving to their new pot in a few days.
The banking system has the switch guarantee. This means you can switch current account in seven days. And moving current account is a whole lot more complicated than switching a DC pension should be.
We need the crash bang wallop of open banking to make pot for life work. We’ve failed to get it so far, what makes us think we’ll get it going forward?
Pension crashboard?
In practice, the pot consolidation and pot for life initiatives are doing the heavy lifting that the dashboard was originally meant to do. I notice that some of the European dashboards are finally considering offering transactions through the dashboards. That’s decades after they started.
What Ian and those intimately involved in dashboard design should contemplate is that if most people have most of their pots consolidated, the mass market need for dashboards – diminishes. Is the pot-for-life initiative an intentional distraction – so the dashboard isn’t considered a “crashboard”?
