Savers at risk from UK’s pension ‘pot for life’ plan, industry leaders warn

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A proposed shake-up of the UK’s pension market to give millions of workers the right to choose a retirement “pot for life” risks leaving savers worse off, industry leaders and unions have warned.

In last year’s Autumn Statement economic plan, the government issued a call for evidence on a “lifetime provider” model, which would allow consumers to stick with one pension pot throughout their career.

Currently employers are obliged to pick a pension scheme for the workforce and put workers into it, with legal minimum levels of contributions. Employers are not obliged to pay into a pension plan chosen by their workers.

The government argues that present arrangements, in place since 2012, have led to millions of small pension pots building in the system, as workers change jobs over their careers.

Responses to the call for evidence, which closed on Wednesday, mostly warned the shake-up could backfire for savers.

“The government’s proposal risks making the situation worse by placing more responsibility on savers,” said Paul Waters, head of defined contribution markets with Hymans Robertson, a professional services firm.

“Many defined contribution scheme members lack the financial education and confidence to choose their own pension provider. The pot for life model risks members making poor decisions based on the cheapest or best marketed solutions, rather than those offering the best value for money.”

In its response, the Society of Pensions Professionals, an industry body, raised “grave” concerns about the lifetime provider model.

“Severing the employer link and putting all the decision-making burden on savers could lead to suboptimal decisions, as well as reducing market innovation and competition,” it said. 

The government has said a lifetime provider model could see British savers adopt a system like that in Australia, where the pension pot follows the member when they change jobs.

The Trades Union Congress, the umbrella body for unions representing 5mn workers, branded the proposal a “dangerous gimmick” that could “expose workers to higher costs and lower pensions, with low earners the most likely to end up worse off in retirement”.

PensionBee, a pension consolidator, was one of the few pension providers to express public support for a system shake-up.

“There are clear consumer and industry advantages to having one pension pot that workers can choose for themselves,” said Becky O’Connor, director of public affairs at PensionBee.

“The benefit of not having multiple pensions littered through someone’s work history is that there is less chance of losing valuable sources of retirement income, which is a significant and growing problem.”

Pension specialist Tom McPhail, of Lang Cat, a public affairs consultancy, acknowledged supporters of the proposal were “definitely a minority”, but he urged the government to “press on” with its work on the lifetime provider model as a solution to the build up of small pension pots in the system.

“This problem has been kicked down the road for too long already,” said McPhail.

The government has not set a timetable for introducing a lifetime provider model.

The “pot for life” proposals come alongside a broader push by the government to increase pension fund investment into areas that could help the economy, such as early-stage companies and infrastructure. 

The government believes more private capital in so-called productive finance areas could deliver better returns for the economy, as well as retirement savers.

Mick McAteer, a former board member of the Financial Conduct Authority, said if the government wants to meet dual goals of “pot for life” and improving retirement outcomes, the best model would have been to establish industry-wide pension schemes that worked across industries and professions.

“Whichever model is adopted, the critical thing is to protect independence of schemes so that schemes are not used as direct agents of government policy on so called productive finance,” said McAteer.

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