The government has confirmed that it will launch a consultation around the creation of a ‘pot for life’.
This measure proposes that a member of an AE scheme would have the right to choose which scheme pension contributions will be made to instead of auto-enrolling into the employer’s scheme.
Emily Campbell lawyer at Charles Russell Speechlys said that this reform is likely to be popular among members who will feel they have more control of their savings.
However, she expressed her concern of how employers will be sure that their members have taken appropriate financial advice before making the decision.
She said: “One wonders how employers can be sure that members will have taken appropriate financial advice especially given the types of free investment choices offered by SIPPs, which sometimes lead to heavy losses and complaints of misselling.”
Great idea ‘in theory’
Jamie Jenkins director of policy at Royal London pointed out that while the idea of allowing members to choose their own pension scheme is a great idea in theory, he believes that it could lead to a pensions system dominated by higher charges, prolific marketing and higher risk schemes.
He said: “Automatic enrolment into workplace pensions has been a huge success story and the relationship between employers and their employees is pivotal to this.
“A ‘pot for life’ model would significantly undermine this dynamic by requiring employers to navigate an increasingly complex array of payments to different providers. Ultimately, it may disenfranchise the very group of people we’ve relied upon to deliver the successful rollout of automatic enrolment.
“If we really want to engage future generations in their retirement savings and address the proliferation of small pension pots, we should focus on a digital solution by delivering a fully functional pensions dashboard.”
Lack of engagement
Jon Greer head of retirement policy at Quilter also highlighted that the new proposal may take a while to gain traction due to many people’s disengagement when it comes to their workplace pensions.
He commented: “Though this proposal sounds positive on the surface and will be useful for those members who are keen to take ownership, it has flaws.
“The ‘pot for life’ would likely take a long time to gain traction, not least because the majority of workplace pension savers are largely disengaged.
“They simply trust that their employer gets on with setting up their pension through the auto enrolment process and they therefore may not be keen to engage with a system that requires them to play a more active role.”
Andrew Tully technical services director at Nucleus suggested that to make meaningful positive change to long-term savings habits there needs to be more engagement from people about why they are saving.
He said: “Our recent Retirement Confidence Index highlights we need more people who save more into their pension, to understand why they are saving and what for, and are empowered to save in an environment of trust and stability.
“It is worth exploring whether a pot for life can help achieve those aims.”