interactive investor proposes ‘Pension Choice’ model

We respond to the DWP’s call for evidence as part of small pots consultation.

In its response to the DWP’s call for evidence to address the growth of deferred small pots in the automatic-enrolment (AE) workplace pensions market , interactive investor, the UK’s second-largest investment platform for private investors, expresses its concern that the current consultation is too narrow and should include a Pension Choice model with the option for workers to choose their pension provider.

Adopting an automatic consolidation model removes member choice, erodes member responsibility for their retirement saving and increases the sense that pensions are complicated.

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Adopting a ‘pots follows member’approach erodes pension flexibility. A member may be happy with their old pension scheme or be planning to consolidate pensions using a lower cost option, eg a SIPP. There can be no assumption that a new job means a better pension, either in choice, value, or performance. We therefore think that this could potentially compromise retirement outcomes.

Instead, interactive investor supports pensions choice and the ability for pension savers to be able to choose their workplace pension provider and to bring forward the Pension Dashboards solution.

We propose the following Pension Choice model:

• Maintain existing auto-enrolment architecture as the default system
• Allow members the right to ask their new employer to pay their auto-enrolment contributions into an alternative pension such as a SIPP or previous workplace pension.
• A clearing house solution: employers could pay pension contributions to a clearing house, which would distribute contributions across multiple providers, ensuring any new administration burdens for employers would be minimised.
• We believe there should be a nationwide financial education campaign to help ensure people engage with their pensions.

Alice Guy, Head of Pensions and Savings at interactive investor says: “On the whole, auto-enrolment has been roaring success, but the current system still has many flaws and is due for a health check. Many workers have an array of smaller pension pots, accumulated through many years of working for different employers. And self-employed workers are often left behind under the current system, disengaging from pension saving once they become self-employed.

“But instead of a ‘pot follows member’ approach, we think people should have the freedom to engage more positively with their pension. A member may be happy with their old pension scheme or be planning to consolidate pensions using a lower-cost option, eg a SIPP. There can be no assumption that a new job means a better pension, either in choice, value, or performance.”

Interactive investor’s Pension Choice solution suggests maintaining existing auto-enrolment architecture as the default system but allowing members the right to ask their new employer to pay their auto-enrolment contributions into an alternative pension such as a SIPP or previous workplace pension. It has a number of benefits:

• It would reduce the number of small pots as members could keep the same pension provider when they move employer. 
• It would promote member engagement by encouraging active decision-making and creating a relationship between member and pension provider which extends beyond the workplace.
• Allowing employees to pick their pension provider would reduce costs to industry by reducing unnecessary ‘friction’ costs to employers or pension providers incurred by moving pots of money around in the pension system – this is inherent in the proposed Consolidator and PFM models. 
• It would encourage self-employed pension saving – a significant problem under the current auto-enrolment system. Pension choice would create a sense of ownership by creating a relationship between the member and pension provider that extends beyond the workplace. It would also help keep individuals engaged in retirement saving as they move from employed to self-employed.
• It would promote competition between workplace pension providers and potentially encourage lower fees: At the moment there’s little incentive for pension providers charge competitive fees to members as the relationship is between pension provider and employer and members that leave are replaced by new members.
• It would promote value for money by ensuring that members can choose their own scheme. For example, interactive investor charges flat fees, which means someone with an existing pension pot would pay no more fees as their pension contributions increase the value of their pension pot.