What are pension pots for life? Autumn Statement set to reveal ‘auto enrolment 2.0’ shake-up – here’s how they could work

Savers will be allowed to open a ‘pension pot for life’ that all current and future employers can pay into under government plans which may be revealed in the Autumn Statement tomorrow.

The move is reportedly part of a wider package of pension changes aimed at using the nation’s retirement savings to boost UK economic growth.

But the ‘pot for life’ proposal divides pension experts. 

Many welcome the idea and liken it to having a bank account, but former Pensions Minister Steve Webb describes it as ‘putting an explosive under the entire workplace pension scheme’.

People auto enrolled into pensions currently acquire many different pots over a lifetime, as every employer chooses and runs – or outsources to a specialist provider – a separate scheme.

The option of choosing one pension pot that sticks with you through life – which we wrote about in detail last month – instead has been under debate for some time as a way of curbing the vast number being created every time people start a new job.

The Government is also looking at ‘default consolidation’, where lost small pots would eventually be placed with an approved provider until they can be reunited with their owners again. 

How would a ‘pot for life’ work?

It would effectively be ‘auto enrolment 2.0’, according to supporter Tom McPhail, director of public affairs at research firm Lang Cat.

Initially, employees would simply get the right to choose their own pension and to have contributions paid in by their current employer, he says.

‘In the longer term it could also mean modifying the auto-enrolment system. 

‘We would like to enhance auto-enrolment through “pot for life” becoming the default option for all workplace pension savers.’

Whenever you started a new job, your contributions would be sent to your existing ‘pot for life’, unless you chose otherwise.

If you didn’t already have a pot for life or say otherwise, your contributions would go instead to your employer’s default pension provider.

Meanwhile, employers currently send pension contributions for all their staff to one provider, and won’t want to start making payments to a myriad of schemes.

To get around this there would probably have to be one clearing house, which would become the new destination for all pension contributions, and then be responsible for redistributing them.

And all ‘pot for life’ providers would have to be approved for suitability, and regulated to ensure people’s money was being looked after properly and they weren’t being overcharged.

Would ‘pension pots for life’ be a good deal for savers?

Wealthy pension savers would be wooed for their business while a rump of less ‘profitable’ savers might end up worse off.

Questions have also been raised about charges, and how easy it would be for individuals to pick the best ‘pot for life’ for their needs.

There is also the issue of whether a scheme that looks a decent option when you are in their 20s will still be suitable as you approach retirement

‘Regulation would be needed to prevent “cream skimming” of wealthier customers,’ warned Phil Brown, director of policy at pension scheme provider People’s Partnership, when we recently investigated how the system might work.

‘It would be essential that all providers operating in a “pot for life” market would need to be obliged to serve all customers.’

Steve Webb, a partner at LCP and This is Money’s pensions columnist, says: ‘Workplace pensions are currently a ‘wholesale’ business where employers negotiate a good value deal for their entire workforce.

‘As a result, the average workplace pension charge is currently below 0.5 per cent. If the system was fragmented, this bulk buying power of employers would be lost.

‘Top earners would be bombarded with marketing as pension providers sought to “cherry pick” the most profitable business. But the remaining workers would no longer have access to such a good workplace pension.’

Webb also raised the issue of how easy it would be for individuals to compare different pensions.

‘We’re told not just to look at costs and charges, but are we really expecting consumers to evaluate the different investment strategies of their different pension providers?’

He adds: ‘There are much simpler ways of dealing with the issue of small or lost pension pots, such as the “pot follows member” idea when people changes jobs, rather than putting an explosive under the entire workplace pension scheme.’

Pension consultant Barnett Waddingham has pointed out administration of a ‘pot for life’ system would be a challenge, as it’s embedded in the workplace – and, for example, pensions don’t all have account numbers and sort codes as bank accounts do. 

A partner at the firm, Mark Futcher, says: ‘A sudden shift to a ‘pot for life’ risks people choosing a suboptimal pension plan, being swayed by marketing over value, and ultimately exacerbating the UK’s retirement crisis. 

‘What’s more, the rumoured shift to a nominated scheme wouldn’t necessarily solve the problem of savers having multiple pots, or solve the Government’s desire for big schemes investing in high-growth UK assets – this seems to be a lose, lose, lose policy.

‘Pension saving is, by its nature, a long-term problem. The Government must not be allowed to play fast and loose with the rules simply because it has an eye to an election in a year.

‘For a “pot for life” to work, there must be a robust central clearing house, a working pension dashboard, and a faultless administration system which directs contributions and amplifies the employers’ critical role in ensuring value and good governance. Twenty-four hours’ notice to a system overhaul can only result in one thing; chaos.’

But Becky O’Connor, director of public affairs at PensionBee, says ‘pot for life’ would a great solution to the problem of people having lots of old pensions from multiple jobs.

‘A pension could become a bit like having a bank account, into which different employers can pay. It’s good for savers, giving them more say over how they want to grow their retirement fund and hopefully a decent solution to the problem of lost pension pots.

‘Pot for life has the potential to shake up the industry, bringing what consumers actually care about to the forefront, boosting competition and bringing the way people engage with pensions into the 21st century.’

Tom Selby, head of retirement policy at AJ Bell, says: ‘Advocates of ‘pot for life’ reforms argue allowing savers to choose their own workplace pension scheme – and then nominate that scheme to receive their contributions when they switch jobs – would help address the problem of lost pensions. 

‘Employees would also potentially benefit from greater choice and flexibility, while the broader auto-enrolment market would be subject to competitive forces that are comparatively weak at the moment.

‘The biggest sticking point to these proposals is the burden on employers. Currently, UK firms of all sizes – from corner shops to multinationals – are required to set up a workplace pension scheme for their staff. 

‘Some sort of clearing house would therefore be needed to channel member contributions to multiple schemes, with slick processes so firms are able to easily connect.  

‘That won’t come cheap, so the next obvious question is how much could that project cost and who will pay for it?’

Selby says a ‘call for evidence’ to scope out the pros and cons would be a sensible approach. 

And he adds: ‘Given the proximity of the general election and Labour’s substantial lead in the polls, there is every chance Keir Starmer’s party will have the final say on whether these reforms ever see the light of day.

Simon Laight, pensions and lawyer at Pinsent Masons, says: ‘The “pot for life” is a seismic reform for pensions. 

‘If the buying decision is moved to the employee, pension providers will have to re-engineer their distribution channels. 

‘They’ll be selling to individuals, rather than to corporates, converting workplace pensions savings into a retail market. There won’t be financial advisers to serve the market, so direct to consumer will become dominant. 

‘The bigger providers will be able to adapt – improve the attractiveness of their proposition, find introducer arrangements with affinity groups, invest in sales drives. It will lead to consolidation with an expected smaller number of larger providers.

‘Buying a pension is fundamentally different from shopping around for petrol. Not everyone is knowledgeable on pensions and consumers need protection as they might mis-buy. We need to guard against the pension misspelling scandals of the past.’

RSM UK’s head of pensions, Ian Bell, says: ‘Putting the onus on the individual worker, rather than the workplace, to select an appropriate pension fund raises concerns for two reasons. 

‘Firstly, financial literacy around pensions is currently low among many UK workers. There is also much apathy generally around the importance of pensions until workers get close to retirement age, by which time it is often too late to improve the situation. 

‘The current system, where workplaces undertake due diligence and the selection of an appropriate fund on behalf of employees protects them. 

‘Expecting employees to select the best fund to give them a comfortable later life will be something many will not be equipped to do, and seems likely to result in poor outcomes and poverty for many future retirees. 

‘We’d therefore urge the government to prioritise improving financial literacy and education around pensions if this is the direction the Chancellor wants to go in.’

Andrew King, retirement planning specialist at  Evelyn Partners, says that while on the face of it a pot for life sounds beneficial for the saver, it could also be fraught with difficulty.

‘If it means that workers will have the option not to join their employer’s default arrangement, and instead to opt for one of several external schemes, it’s hard to see how this could be made to work without significant administrative difficulty and cost, and probably some unintended consequences.

‘It flies in the face of the well-established auto-enrolment system, which simply places employees in the workplace scheme, which their employer has usually contracted from a pension provider.

‘While this might mean that employees who move jobs do accumulate a number of pots, it’s not clear that this is the best solution to that issue. Employees can currently transfer and amalgamate old pensions pots, often at zero cost, either into their current employers scheme or into a personal arrangement.

‘For one, it means employers could be paying pension contributions to many different pension providers via a spiders’ web of direct debts. It’s also quite possible that it would open the door to scammers as employee funds would be leaving the ambit of a single, approved employer-arranged scheme.

‘In the Australian workplace system, the pension companies are “superfunds”, all approved by the government and working under the same rules. In the UK, there isn’t the same infrastructure, with currently only one superfund and a plethora of possible pension providers of all shapes and sizes.

‘Unless some of these potential pitfalls have been considered, such a bombshell into the auto-enrolment system could be a lot more problematic than, for instance, making it easier for employees to track and roll up their pots into their new employer’s scheme or a personal pension.’