This paper builds on the SMF paper published in December 2023, which argued for ‘member choice’ in pensions. With such a proposal under consideration by the Government, it addresses some common questions and misapprehensions.
KEY POINTS
- Giving employees the right to choose where to send their pension contributions (‘member choice’) would bring several improvements:
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- address the flow of ‘small pots’ accumulated across disparate jobs
- encourage providers to treat individuals, not employers, as their key customers
- help savers engage more with and take ownership of their savings
- Any risk of lost cross-subsidy within pension schemes from larger to smaller contributors should be weighed against the benefits to ordinary savers of:
- having a single pot: efficiency and reduced risk of losing savings
- lower charges in a more competitive market
- higher engagement (and potentially, higher contributions)
- Better, more personalised, customer service
- Under the proposed scheme, employees would not be required to choose a provider themselves: the changes would be integrated into auto-enrolment, and their savings could be integrated in a previous or current employer pension by default.
- Employers should not be disenfranchised by the changes – they should recognise the benefits of a single pot for their employees
- Lifetime providers would remain highly regulated, and savers should therefore be protected against poor value for money and scams
- A central clearing house – ‘PensionClear’ – is a critical component of the changes to maximise efficiency and minimise the burden on employers
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