No evidence lifetime provider model will help savers, but risks undermining automatic enrolment
24 January 2024
The PLSA's response highlights backed by consumer research, about the potential impact of such a radical shift and urges a thorough, evidence-led examination before moving forward.
Impact on automatic enrolment (AE)
The ideas set out are very conceptual, however the system-wide outcomes that would be achieved by a Lifetime Provider model remain unclear. The radical nature of the proposed model does however have the potential to significantly undermine the successes of AE, which harness inertia for savers while maintaining the vital role employers play in negotiating on behalf of their employees, which itself supports continued innovation in the commercial AE market.
Impact on savers
There is little evidence that the introduction of a Lifetime Provider model will have benefits for savers.
Moving from a whole workplace approach to a more individualised system will disproportionately impact less wealthy and less informed savers, currently benefiting from the bargaining power and good governance of their employer. A Lifetime Provider model is – for example - likely to disadvantage the low paid, who are disproportionately women, compared with the current model of Automatic Enrolment. This could be exacerbated by the loss of collectivisation and cross subsidy for small pots benefits, and a shift towards retail-like charging structures which currently tend to be more expensive.
International evidence suggests substantial technological, operational, and cost implications associated with similar models, with limited switching observed among savers.
While elements of the Lifetime Provider model may seem attractive to savers, the PLSA research reveals that over two-thirds (69%) of employees would prefer their employer to choose their workplace pension provider. Moreover, 55% of employed workplace pension savers express minimal confidence in making such choices, highlighting the need for caution in implementing a model that emphasises individual decision making.
Additionally, predatory marketing, encouraging savers to switch to ‘poor value’ schemes, may lead to unwelcome consequences, such as increasing opt outs and cessations. It could also lead to an increase in scams occurring. The risks of fraud are likely very high where insufficient protection is provided to the saver to ensure they are choosing a safe scheme. Finally, costs of marketing would be expected to increase substantially.
Financial literacy challenges
With financial literacy amongst British people at a low (only 5% with a high degree and 73% falling below the financially literate benchmark), there is a risk that savers will make poor choices, such as choosing a higher cost scheme, based on advertising, which result in harm to their long-term finances. Previous DWP analysis has shown that an individual who saves for their entire working life could – everything else being equal – see a private pension income that is over £1,800 a year (25%) higher if they saved in a scheme with a 0.5% charge on funds under management compared to one with a 1.5% charge (retail fee) on funds under management.
Consideration of policy context
Many of the issues that the Government hopes to address by the introduction of the Lifetime Provider are already being dealt with by a series of existing initiatives. Existing policies such as Dashboards, Value for Money, and Default Consolidators, should address issues related to lost pots, consolidation, and small pots. Distractions from the pursuit and completion of these initiatives should be avoided, and any new interventions such as the Lifetime Provider should only be considered once the cumulative impact of these changes are understood.
It is widely agreed that the biggest issue facing pension saving in the UK is the low level of DC pension contributions. Most of the pensions sector believes that automatic enrolment contributions need to gradually increase from the current level of 8% of a band of salary to 12% of earnings. The proposed Lifetime Provider model does not do anything to address this issue and spending time on developing it may act as a distraction from the core task of ensuring everyone has a better income in retirement.
Joe Dabrowski, Deputy Director - Policy at the Pensions and Lifetime Savings Association, said; "The Lifetime Provider model would amount to a radical change to the way most people in the UK save for a pension and potentially undermine the success of automatic enrolment.
“There is little, if any, evidence to suggest the model would result in better outcomes for savers. Many people, especially those on lower incomes, would miss out on the benefits of cross-subsidy that exists in workplace pensions and a value-for-money scheme carefully chosen by the employer. In general, it is likely to lead to sharp increase in marketing and product costs which will ultimately be borne by savers.
“Our research underscores savers' preference for employer-selected providers, indicating a loss of bargaining power in an individualised system. Given that financial literacy in the UK is notoriously weak, adopting a lifetime provider model where the member must choose their pension is very likely to result in worse outcomes for the majority of savers than the current model.
“The immediate focus should remain on delivering significant interventions including the Dashboard, Value for Money Framework and progressing the Default Consolidator solution, and then understanding the impact they have made. It is also widely recognised that the change that would have the greatest positive impact the quality of pensions outcomes in the UK would be tackling the Adequacy crisis – this should be our collective number one priority."
Cali Sullivan, PR Manager
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