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In the UK, employers choose a pension scheme for their workforce. Employees, in the main, don’t get much of a choice and will end up with multiple savings pots as they move from job to job. And while that has not hindered the early success of automatic enrolment, which is widely recognised as a huge step forward for saving in the UK, we argue that the end-state for this flagship pensions policy should include the option for employees to choose their own pension provider and product.
There are a number of good reasons to offer employees this flexibility. It will make it easier for savers to manage their pension, with just one pot to oversee. The pensions dashboard will eventually make it possible for people to view their whole pension wealth, but that’s not the same as being able to manage it all together. Currently, ‘everything in one place’ is only possible if employees consolidate into the product chosen by their current employer and keep doing this for every new employment.
But while employers choose a scheme to suit their requirements and the particular needs of their workforce, this might not be the best fit for every individual employee. Offering meaningful choices could better align savers with the features and services they value the most. For example, some might prioritise a wider range of investment choices and a drawdown facility in the same product. Others might place most value on the customer service they receive or the education and guidance they can access. Savers would also be able to choose for themselves whether they are happy to pay more to get more.
Moreover, the industry could see new innovations and other improvements as more providers find new ways to retain and attract customers. And as the pension landscape further develops, there could be even more significant choices customers could make.
Collective Defined Contribution (CDC) pensions will soon be introduced in the UK, with the Royal Mail’s workforce moving to this new type of pension. CDC aims, among other things, to share risks, including investment risks, between employees. Instead of each saver managing their own distinct savings pot, they build up entitlements to a share of a collective fund. Investment outcomes are smoothed and savers won’t experience the full upside or downside that they might have if they carried the whole risk individually. This approach will appeal to some workers but not all. But as things are currently planned, individuals won’t be able to choose. For any given worker, there is only the choice of paying into the pension chosen by the employer, or to opt-out entirely, missing out on valuable employer contributions.
As we seek to build on the foundations of auto-enrolment, there are many challenges for the UK. Increasing engagement with pensions is one of the biggest. That’s why we want people to feel ownership of the pensions, recognising that they are linked to themselves – not their jobs or their employers. We expect that a greater sense of ownership over a savings product should help boost engagement as people realise it’s their money and that they have choices to make – it’s not something abstract, tied up with their work, to be considered when they’re older.
Therefore, we believe policy change will be needed in the near-future to put more choice in the hands of savers. Many may not want to make a choice and that’s fine, the employer-chosen scheme should continue to be the default.
Until this flexibility is offered to customers, employers can only try and ensure their current scheme is offering the best value they can get for their workers, while keeping employees informed about the option to transfer-in previous pots.
Written by Mat Zimmerman, Market Development Manager