Pensions auto-enrolment is an undoubted policy success, save for one unintended consequence – it is producing a torrent of new small deferred pots that no longer receive contributions. Deferred pots in the master trust market are projected to grow to around 27 million by 2035 if no changes are made to address the problem.
In the recent Autumn Statement, the Chancellor announced a call for evidence on a lifetime provider model. This would help individuals to move towards having one pension pot for life, thereby helping to tackle the long-standing problem of “small pot” pensions.
This briefing details a “member choice” proposal, whereby members of workplace pension schemes would be given the right to choose the pension scheme (and provider) into which their employee and employer contributions are paid. Essentially, the exercise of member choice would become a major mechanism for achieving a pot for life.
SUMMARY
- The DWP proposal to establish multiple consolidators to help reduce the existing stock of small deferred pension pots is welcomed. Meanwhile, over one million new sub-£1,000 pots are being created every year, fuelled by automatic enrolment.
- To help arrest this flow, this paper proposes that members of workplace pension schemes should be given the right to choose an alternative destination for both their own, and their employer’s, pension contributions; “member choice”.
- A change of employer would then be less likely to spawn a new pot; employees would naturally continue to use their chosen pot.
- Crucially, any potential destination pot should be required to meet automatic enrolment’s qualifying scheme criteria, notably in respect of minimum contributions, member protections, and access to a charge-capped default investment option.
- A phased implementation is envisaged:
- Initially, individuals would be given the right to choose where their contributions are paid to.
- Subsequently, individuals’ right to choose could become the default (i.e. automatic) route.
