Tom Mcphail

Michael Johnson

I’ve been slow on the uptake with regards Michael Johnson and Tom McPhail’s new paper on “pot for life”

It’s been sat in my inbox a few days and meanwhile Patrick Hosking has covered it in the Times. calling the pot for life proposals “seismic reform”.

If we can get to a point where people are satisfied with their retirement saving at retirement – we will have come a long way. Right now, most people end up with too many pots (some of them lost) , little understanding of what the pots have in them and even less understanding of what to do with all the money that they’ve saved over the years.

I’d say that  ensuring a “pot for life” happens, would be a “seismic reform”, even more so than a pension dashboard , but it will not solve the problem of how to get the money out of the pot, which I guess is seismic squared.

Other than mentioning that the Johnson/McPhail report has a foreword from new pension minister Paul Maynard, the Times report does no more than remind us of the problems of workplace pensions, I intend to work out what the SMF paper does to take us a stage further than the Pot for Life proposals outlined in the Autumn Statement.

Maynard ( or whoever writes these forewords) says

The Social Market Foundation’s report provides an interesting perspective on the benefits of member choice and a single pot for life approach.

but we really need something more tangible to distinguish what this paper says that the Government didn’t say a couple of weeks

An interesting perspective

The new perspective is that of the member, as pointed out by Lawrence Churchill who provides a second foreword

This Policy paper sets out a solution which begins with the end in mind – empowerment of the individual to direct their own contributions to the provider of their choice (as has already happened in Australia) and sets out how it can
be overlaid onto an occupational pension system.

What is actually going on in this paper is a return to the original conception for a personal pension – now 35 years old. The idea was that people chose a personal pension and then used it whenever they had the chance to build up one great pot. But there were problems with this, firstly – the personal pension was funded using a standing order or direct debit from the bank account, it had to rely on employers setting these up. Fine if you are an SME with a care for pensions but not great if you are any other kind of employer. Employers did not buy. Attempts were made to make it easier – Stakeholder pensions were supposed to make the employer’s life easier – they were opposed on a quasi collective basis but already the link to the first personal pension was gone. And back in those days, if someone joined a “company pension”, they had to suspend the personal pension.

Within a few years of launch in 1988,  the idea of a personal pension as a portable pot for life looked dead in the water.

The question is whether it can be be resuscitated.

I think it can be , but it will be of interest to only a proportion of the population. In Australia , the idea of the “retail super ” account, which is their equivalent of a personal pension has been a success.  Similarly in America the self directed IRA and around the world – tax incentivised self-managed retirement accounts have taken off – for those with the time, money and interest to take control of their money.

And there are plenty of tail-winds in the UK for personal pensions to re-emerge as a key element of workplace pension saving

1. Employers are not so in love with having their own scheme, most have closed DB schemes and many DC schemes have been consolidated by master trusts.
2. Payments are now easier – payroll support makes running feeds to multiple personal pension providers much easier – clearing hubs would make it easier still
3. There is a growing group of affluent savers who use advised and non-advised retirement savings platforms. Pension Bee, Hargreaves Lansdown, SJP , AJ Bell and the wider wealth management industry are proof of demand
4. There is increasing concern that small pots will act as a break on master trust innovation, re-directing resource from productive investment to the payment of administrative and levy fees (this is already a big problem)

So the circumstances of relaunching personal pensions are more propitious and this is why Tom and Michael’s paper should find favour, not just with politicians but with many savers who would rather manage their account than leave that to anonymous trustees.

About the paper

Unusually these days, the paper relies on a narrative rather than research or modelling, so it is remarkably free of data and makes its arguments around ideas of utility – what’s good for people , is good for pensions – is good for society.

It says what it has to say in 14 pages and covers a  number of innovations such as a P45 nudge (reminding people where their old pension is).

It envisages a period where – without the need for changing legislation, non-workplace pensions would become workplace pensions and start competing for contributions with master trusts and approved workplace pension GPPs. As a second stage, the paper sees the process of “stapling” where employers are mandated to locate and pay into the previous workplace pot, as arriving once legislation is in place.

So what’s new?

This is a new “perspective” not a new idea. If the employer who says “no” to paying into the requested pot finds itself losing out to those who do, it may comply with best practice.  But this looks a stretch. I suspect that mandation will be needed to get compliance.

Is there sufficient demand for pots for life among consumers to drive appreciable reductions in pot proliferation and better engagement with the chosen pot? There may be but this has to be tested, Australia , the USA and Canada are examples of countries where we are told people own their pensions rather more than in the UK. ISAs and savings accounts get much higher recognition from consumers than pension providers , these may be better comparators.

I suspect that the best way to see , is as Johnson and McPhail suggest, to start with a voluntary system of coercion and move to a mandated system over time.

But this assumes that there really are changes in the way employers and workers think and the acid test of that is not to be found by think-tanks and consultancies, it will be revealed by actual behaviour.  The risk of the proposed approach is that nothing much changes and we are another five years down the line. That is the same old same old.