So it looks as if we’re moving to a ‘pot for life’ regime in UK Pensions. Quite a change, eh?
My thing is looking at these big policy issues from the angle of ‘how’ to do it rather than the ‘why’ or ‘should’, and some things are occurring to me.
When I was in a band writing lyrics (terrible, by and large) I was given a bit of advice: never use the word ‘just’ as a filler. When it comes to major changes to the UK pensions landscape I would also ban the word ‘just’ when describing how we could make changes.
In an environment as complex as UK pensions no change is as simple as “We just change to a pot for life”. It will be a complicated process and it will need some big changes to be made to the way we manage pensions.
This is not to say that it is a bad idea. Nor even a good one. It is however something that we have to consider as we decide which system best suits the UK. It’s important to accept that these changes will need proper consideration and planning.
Picking a pension
At the moment most people don't choose their pension. Their employer does, or for some, their financial adviser. I can’t see how the advice industry as it exists now is going to step in to fill the gap so most people will have to start making a choice.
I don’t see this being a fundamental challenge though. We already choose bank accounts, insurance and types of beer without advice. We use branding, comparison websites and all sorts of other things to make these choices, so we will likely do the same with pensions.
The challenge here is for the FCA to regulate a market that will be aggressively pushing for customers in a way it doesn’t now.
Tell the employer
When we start a job now we tell our new employer what bank account we want our pay to go into. Doesn’t seem like a leap that we also tell them our pensions details.
The part that is interesting at this stage is what details should we be telling them? At the moment we don’t have a universal system for identifying a pensions pot. Not in the way that the account number and sort code work for a bank account.
To make life easier for the member and the employer I think we need to think about an equivalent of the sort code for pensions.
The other issue is we absolutely don’t want a situation where the employer even has to think about what pension their employee has chosen. If it’s a properly registered pensions scheme then they should just pay the money into it.
Therefore we need to regulate bad actors off any registry, white list or whatever method we have. It shouldn’t be possible for an employer to pay money into a dodgy scheme. That means the regulators have to get off the fence and actually say that some schemes aren’t suitable.
Get paid
Work hard all week / month and you expect your employer to pay you. As part of which they also deduct NI and income tax and give that to HMRC and then they deduct pensions contributions, and give that to your pensions provider.
This is where the new regime would kick in and potentially make life much more complicated for employers. Currently they usually pay into one provider. In the future, in theory, each member of staff could have a different pensions provider. Each with a different interface to submit the payment, a different bank account it has to be sent to, etc. Nightmare!
Except they already have to do this for our actual pay. We all have different bank accounts after all.
The difference is that banking has a slick infrastructure set up to deal with this and payroll systems are built to do so. Which is not the case with pensions.
We need to put in place a process and systems that make this easy for employers from the start.
There are different options on how to do this. Open API standards let the payroll take the strain or a clearing house(s). My sense at the moment is that the clearing house is probably the best option. It’s what they do in Australia.
Pensions that are open to taking the money
At the moment it’s surprisingly hard to pay money into your existing pensions pot. I know as I’ve been fighting to do this myself recently as newly self-employed.
Money laundering controls, risk appetites and manual processes mean that setting up to pay money into a pot from a new employer is either simply not allowed, or a pain in the posterior. This cannot be the case if we want ‘pot for life’ to work.
Some people change jobs regularly, especially in retail and hospitality. It’s what causes the small pots issue. We absolutely need a system therefore that allows for pensions to be taking money from different employers without any need for intervention.
System wise I don’t see this as a big issue, but there will need to be a long hard think about how we deal with money laundering. Somewhere in the process there will still need to be rules around how we prevent a pension being used to wash money.
I would suspect checks on employers and identifying suspicious behaviors through data reporting will be the way. Also there may be a role for the clearing house here.
Changing your mind
The whole basis for ‘pot for life’ really is that choice and the market should mean that pensions will, through competition, provide good value for members. For this to work it should be as easy as possible for a customer to move from one pension to another.
And frankly as an industry we totally suck at this.
We demand letters of authority before we share the data needed to make the decision. We make firms do a lot of checks before they release the money. We have processes that are manual and the same as we had in the 80s. We make people seek financial advice or go to Pensionswise in order to move their pensions… The list goes on.
That’s not good enough now, and it certainly cannot be good enough for the sort of pensions market that ‘pot for life’ is designed to create. People should be able to move pensions provider with a minimum of fuss and with the money moving to their new pot in a few days.
The banking system has the switch guarantee. This means you can switch current account in seven days. And moving current account is a whole lot more complicated than switching a DC pension should be.
Conclusion
None of these issues are insurmountable. After all, the Aussies do it already.
But they do need to be considered, solutions designed, systems built and processes changed. That takes time and money.
There are also a lot of embedded interests, firms with a solution looking for a problem, and people who will either tell you it's impossible or really simple. I would like to humbly suggest that it would be helpful to have somebody truly independent in the room… ahem.