By Niamh O Regan
Allowing employees to choose their pension provider and consolidate their contributions into one pot is popular with Gen Z who frequently move jobs and could help them be more financially secure in the future, Says Niamh O Regan
By and large, people choose their own financial products. Who to bank with, where to lodge their savings, who their mortgage provider is, which insurance product to buy. Pensions, however, have long been an exception to this. For the majority, saving for a pension is something that happens to them.
But this may be about to change. The government has proposed moving to a system of “pot for life” for pensions, where instead of getting a new pension with every new job, workers will find it easier to consolidate their savings into a single scheme.
One proposed method of doing this is with member choice, where the employee (the member), decides who their pension provider is, rather than the employer. The move would give employees the opportunity to shop around for the pension provider that best suits their needs, much in the way they already do for other financial products. Or – if they so wish – to just redirect their contributions to their existing scheme.
Though it feels like the government can’t get anything right just now, a survey we conducted earlier this year found that the public is largely supportive of a move to member choice, particularly younger generations. Our survey at the SMF found that 70 per cent of people with defined contribution pensions would be in favour of the change, rising to 76 per cent of 18-24 year olds and 78 per cent of 25-34 year olds.
To some extent the support for this change marks a wider cultural shift. Not content with passivity, Gen Z will demand a voice over what happens with their pension – for many their largest financial asset – and where it is invested. A change in approach to pensions would reflect a broader trend. Gen Z are less likely than previous generations to use traditional banks, and more likely to switch banking providers or open a new current account.
Member choice also makes practical sense for younger generations. While it’s useful to be auto-enrolled into a pension when you’re employed, an unintended consequence is that many of us are left having to keep track of multiple pots when you switch jobs – which younger generations are more likely to do than their parents or grandparents. Separated out like this, pots can become lost, forgotten and due to the paltry amounts in them, and generate a poor return. Having all pension pots in a single place amplifies the power of those savings; a larger pot to invest means bigger returns.
Proponents of member choice that we spoke to also suggest that over time, it could drive up engagement with pensions, something which currently is notoriously lacking. The hope is that if it is up to an employee to choose where their pension savings go, in the same way they choose where they get their credit card from, they may become more involved.
While the government and the public are on board, some in the pensions industry are more hesitant about change. There is cross-industry support for the first aim of member choice, consolidating existing small pots but there is some concern that putting responsibility on individuals’ shoulders could lead to poorer choices and worse outcomes.
Such concerns need to be addressed if the government wants member choice to succeed. Yet we should not overestimate the extent to which member choice would increase engagement with pensions. Any change is likely to be marginal, not transformative. Secondly, we should reinforce existing consumer protections to mitigate the risk of negative outcomes. Like automatic enrolment, lifetime pension providers will need to meet strict qualifying criteria, and they will continue to benefit from things like the FCA Consumer Duty and Value for Money Framework.
The government is on the right track, but has some way left to go. After decades of harnessing consumer inertia, massive transformations in the UK pensions landscape should come with adequate support and safeguards – to best equip individuals to take charge of their futures.
Niamh O Regan is a researcher at the Social Market Foundation
