by Paul Richardson, Head of UK - SuperChoice
2023 saw a wave of government-backed consultation and industry led reports exploring different ways to improve the effectiveness of the UK workplace pensions system. In particular, how to focus on savers and members outcomes as a continuation of the longer-term vision for the pensions industry - which includes initiatives like the Pensions Dashboard.
The impact of Auto Enrolment in extending private pensions to new savers is well recognised. However, it is now agreed that contribution levels remain too low, and employees remain disengaged until they approach retirement age.
SuperChoice has seen a similar evolution in the Australian Superannuation system as broadly the same challenges have existed.
A key emerging question is:
‘What is the right sequence to tackle the raft of challenges?
A small number of underpinning objectives can drive a logical sequence of priorities to deliver improvements to the overall system.
It is worth reconfirming that good member outcomes lie at the heart of the industry’s purpose – ensuring savings adequacy, supported by understanding and the confidence that pots will deliver reliable income in retirement. Australia introduced the concept of ‘choice’ in 2005 and over time the increased transparency of private pensions has led to fewer bigger pots for a larger proportion of savers and encouraged the engaged to take more ownership of their retirement savings.
To help drive towards these objectives, improving industry effectiveness and efficiency is key.
Industry Effectiveness and Efficiency can be blunted by allowing the stock of small pots to grow. Younger workers change jobs as often as 10 or 11 times in their working life, or maintain multiple jobs at the same time, meaning they are repeatedly enrolled into a new workplace pension. Having multiple pots makes it harder for savers to keep track and plan, and risks reducing net returns by incurring fees and charges.
In Australia, efforts have been put in place to help slow the flow of small pots via what is known as ‘Stapling.’ Aimed at the disengaged, ‘Stapling’ avoids new pots being unnecessarily created with the associated costs and potential confusion for savers.
The DWP (Department for Work and Pensions) indicated they feel there is excessive cost in today’s industry managing what they call the proliferation of small pots, to the tune of over £225 million a year. (Source: DWP Call for Evidence Lifetime Provider, November 2023).
It has been demonstrated via other markets that innovations can be successfully established (e.g. Clearing House model) that provide the critical infrastructure to enable pension market development and reform via the establishment of industry data, payment processes and standards creating a market wide connectivity network. This network makes it easier to interact with a savers pension pot and for employers to pay contributions both to their in-house default schemes and to the preferred choice of the employee.
So, what might be the right, high-level sequence of reforms to deliver an improved pension's framework?
1 Small Pot Consolidation (SPC)
Starting with SPC the immediate issue of the number of small pots can be tackled. This will provide an initial clean-up of such accounts and put the market in good stead for further initiatives. Also, from a technology perspective many of the components required to enable SPC (such as Clearing House and Gateway) will be leveraged in future phases.
2 Pot for Life (P4L)
With SPC providing the initial clean-up for the small pot environment P4L is a logical successor as it will slow the proliferation of small pots being created. P4L introduces the concept of a member routing their contributions to somewhere other than their employer’s default, which would serve well for the following phase. P4L would be able to leverage the investments made for SPC.
3 Choice
The final phase in providing a comprehensive Pension Framework. Choice can leverage all the investments made by the previous phases and expands the use of P4L by allowing a worker to direct their contributions to any pension's provider.
For more information or to discuss, please visit www.superchoiceservices.co.uk or contact paul.richardson@superchoiceservices.co.uk 07918 633031
