Pot for life – a ray of Australian sunshine on the UK pensions market?

When Jeremy Hunt stepped up to the dispatch box last week to deliver his Autumn Statement, the pension industry waited with bated breath after hearing the leaked reports that he was expected to make the biggest change to UK pensions since the pension freedoms legislation in 2015.  As it turned out, there wasn’t a revolution, but the ‘pot for life’ reform was unveiled. Heralded for a while, this allows employees to nominate an individual scheme their employer then pays into (their ‘pot for life’), instead of having to enrol into their latest employer’s company pension scheme. This would bring the UK more in line with the Australian pensions model, known as superannuation or ‘super’.

But how ‘super’ could the impact be on the UK pensions market? On the face of it the benefit to pension members is clear, savers have one pot to contribute to throughout their career, instead of being left with a number of ‘small pots’ from various different employers over the years. Currently pension pots can easily get forgotten about or lost, especially when you consider how often people now move jobs. This change will help support saving for retirement, forecasting and planning, with all contributions made over a 30-to-40-year career being paid into one pot. It is clear this is something high on the Government’s agenda as it has been involved in developing a pensions dashboard to provide those with multiple pensions a place to view these aggregated pots. The deadline for the dashboard to be launched has however once again been extended, this time until 2026, almost a decade after the government first made the commitment to introduce it. Although it’s sensible to presume that if the roll out of ‘pot for life’ happens, it may well bring an end to this project.

The devil will of course be in the detail, and the ‘pot for life’ announcement could either improve or implode the UK private pensions system, depending on the implementation. If we take auto enrolment, the biggest shake up in the workplace pension market in recent history, the roll out was generally smooth, and most importantly it was a success in ensuring that millions more workers in the UK contribute towards their futures. The ‘pot for life’ could have a similarly positive impact but there is plenty to be considered still.

Whilst higher earners or those with their own financial advisors would largely benefit from these changes, a question we should ask is, what would happen to the mid to lower earners, who at present benefit from being part of a well-managed company scheme with competitive charging structures. Would they be left to trawl the open market and end up in schemes with poorer governance, higher charges or inappropriate investment risk levels? This would only exacerbate the ‘financial advice gap’ issue which already plagues the UK in general and disadvantages mid to lower earners.

From an investment perspective, the major workplace pension providers already offer far more investment options than the majority of people will ever need. The open market would require its own regulations in place to ensure that any investments remain suitable for pension savers and still comply with auto enrolment legislation, for example default fund fees capped at 0.75%.

Moving away from the impact on the individual, one of the biggest challenges to employers would be how they make payments to each individual scheme. A tech solution will need to be developed to ensure a slick process when paying contributions to a number of individual pension schemes every month, but how much will that cost and more importantly who will be footing the bill? Let’s not forget too that this administrative burden may fall on HR departments and payroll teams.

There is an opportunity for ‘pot for life’ to be a real success but plenty of thinking and work still needs to be done, not just to member outcomes and regulation, but also on the impact to employers. It’s clear that this project is still very much in the consultation stage, and we are quite some time off anything being implemented. The backdrop to the Autumn Statement is of course the looming general election, which at the very latest will be in January 2025. Given Labour’s substantial lead in the polls it is highly likely that Kier Starmer will have the final say on how ‘pot for life’ develops, but whatever happens, sunnier times may well lay ahead for people’s pensions.