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An average Briton is likely to have at least 11 jobs during their lifetime. But their job-hopping is causing a headache in the pensions market.
Britons are jointly collecting tens of millions of defined contribution pension pots. Every time they start new employment, they enrol in a new pension scheme. Small pots are uneconomic for pension providers to service. For consumers, they swallow up fees.
In response, UK chancellor Jeremy Hunt is mulling the introduction of a pension “pot for life”. Based on Australian precedents, workers would pick the scheme their employer pays into. It has obvious consumer appeal given the administrative nightmare of multiple policies. Fintechs and pension consolidation platforms such as PensionBee would likely benefit from more competition. But unintended consequences abound.
The government has an ulterior motive. Single pots could foster bigger retirement funds. Consumers who shop around for pensions would also demand better returns. This could push pension funds to invest more in riskier but higher-growth assets, which might include early stage UK companies. Hunt is already trying to encourage this through his Mansion House reforms, although they are running into barriers.
The UK should not rush into copying the Australian model. It is starting from a different place. Australia has fewer, larger defined contribution funds. The sums they spend on advertising have come under scrutiny. Returns are higher but so too are fees.
Most large pensions providers are awaiting a planned consultation. Privately they are wary. Many say they welcome competition, yet in practice they dislike it, says William Wright of the New Financial think-tank.
Pension funds would likely compete for top earners with more retirement savings. Charges would go up for others left in default employer schemes, warns former pensions minister Steve Webb, of consultancy LCP.
Hunt will have to make a stronger argument for a pot for life to persuade an industry already wary of his campaign for patriotic pensions.
The Lex team is interested in hearing more from readers. Please tell us what you think of Jeremy Hunt’s “single pot” pensions idea in the comments section below.
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