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The government’s latest pensions gimmick is a dangerous distraction

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The headline pension announcement in today’s Autumn Statement – that the government is exploring a ‘lifetime provider model’ to allow workers to choose their pension scheme instead of their employer – is a gimmick.

It might sound appealing but would likely lead to higher charges and lower retirement incomes for most workers, with the lowest paid the greatest at risk of getting ripped off.

It would also rip up 20 years of cross-party, steady and relatively successful pensions policy making, which has doubled the proportion of private sector workers in a workplace pension.

The scale of the change means this is very unlikely to happen in the time left to this government.

But it risks distracting from the measures we do need, like helping more low paid workers save for retirement, increasing employer contributions, and making it easier to turn a pension pot into an income in retirement.

What’s wrong with letting workers choose their own pension provider?

Since 2012, UK workplace pensions policy has been based on auto-enrolment – requiring employers to pick a pension scheme and put most workers into it, with legal minimum levels of contributions.

This was developed by the last Labour government with support from employers and unions, and was implemented by the Conservative Lib Dem Coalition.

It has been pretty successful. Over the decade, the proportion of private sector workers saving into a pension has almost doubled from 44 per cent to 86 per cent, with the biggest increases among those working for the smallest companies and on low pay.

Workers are then free to opt out of this scheme, change the amount they contribute and, in most cases, pick an investment strategy, but the overwhelming majority stick to the ‘default’ option.

Instead of building on this by making sure these default options work as well possible for most workers the 'lifetime provider model’ – if the briefing ahead of today’s statement is correct – would introduce something radically different, by requiring workers to choose their own pension provider.

The first result of this would be a huge increase in advertising costs by pension providers, passed on to their members through higher fees.

The experience of other countries suggests this could tempt workers to switch from lower cost to higher cost providers, which isn’t generally in their interest.

And the finance sector has a poor record when it comes to mis-selling products and bamboozling customers. People often struggle to understand financial products, and pensions can be particularly confusing as small changes in annual charges can have a big impact on retirement incomes.

It is also likely that the number of pension providers would balloon, which would not be in the interest of savers or help the government in its aim – reaffirmed today – of scaling up schemes so they can provide better value and invest in a wider range of assets.

Finally, this would work against low paid workers – who have generally done well out of auto-enrolment although too many are still excluded from it – as providers would chase the highest earners in pursuit of the biggest fees, while neglecting the low paid.

What should the government be doing instead?

Instead of exploring flashy but unrealistic and potentially damaging new policies, the government should be looking at ways of making the system we have work better.

Some of the measures needed are covered by the blizzard of pensions announcements that came out today.

Putting a duty on trustees to offer ‘decumulation services’ to members and expanding the role of collective defined contribution should help people to more effectively turn retirement savings into a retirement income.

There is also progress on measures to automatically consolidate pension pots worth less than £1,000 so people don’t end up with multiple small pots.

But announcements on the government’s plans to encourage pension schemes to invest more in the ‘productive economy’ are more of a mixed bag.

Although it’s true schemes generally could be investing more into assets that would boost the UK economy, there is little evidence that pushing them to put more into private equity, or making it easier for companies to take money out of their pension schemes when they are in surplus would achieve this and there are significant risks to pension savers from these measures.

But the biggest concern is what is missing from today’s raft of announcements.

Despite the success of auto-enrolment there are still too many workers not saving for retirement at all, and for more than half of savers contribution levels are too low to provide a decent standard of living in retirement.

So the priority for any government should be to increase the number of workers saving for retirement further, and to increase the amount their employers are paying in.

The first step is to implement reforms that have been promised since 2017 to require employers to auto-enrol workers from the age of 18, and to calculate their pension contributions from the first pound of their earnings.

Next, the government needs to phase out the £10,000 earnings threshold that excludes low paid and part time workers from workplace pensions, and set out a timetable to increase minimum employer contributions.

The absence of announcements on any of these policies means today was another missed opportunity.

Instead the measures tabled could introduce significant new risks, from undermining auto-enrolment, to creating new mis-selling scandals, to channelling pension fund money into inappropriate and expensive investments.

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