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There was no wobble board to accompany the chancellor’s pension reforms in the Autumn Statement, but he’s taken his cues from Australia. The idea of a “pot for life” was at the heart of Jeremy Hunt’s strategy — intended to drive better outcomes for savers — and it’s one that readers Down Under will be familiar with.
A call for evidence will explore giving UK workers the legal right to ask their employer to pay their pensions contributions into a scheme of their choosing, rather than one their employer picks for them. I am very supportive of this probe. The problem — as I’ve written before — is that too many British workers are totally disengaged from their workplace pensions, most of which are defined contribution (DC) schemes.
The performance of ‘default funds’ that giant UK pension providers shoehorn the vast majority of our money into varies widely. In Australia, the different superannuation providers shout about the returns they’ve been able to achieve for their investors. Talking about how well your “Super” is doing is a topic of national conversation (plus, this term has more positive overtones than “pension” which makes one think of pensioners, adding to the deception that saving for such a faraway event needn’t be a priority).
In the UK, by contrast, very few savers make an active choice about where their money is invested — indeed, a worryingly high number do not even realise their money is being invested, according to recent research from Boring Money, the consumer finance website. Even if we were enraged about the performance of our funds, employees who are actively saving into a workplace scheme cannot vote with their feet and change providers unless they change jobs, or forgo the company contribution. In the decade since auto enrolment came in, many workers have ended up with a ragbag of pensions from different jobs. Even if you are motivated to consolidate, it’s a fiddly process requiring a level of engagement from customers and company pension providers that simply isn’t there.
I am deeply engaged with my company pension, because I have worked hard to save a lot of money into it. As someone who has recently locked horns with her own corporate pensions provider over an administrative snafu, I would jump at the chance to have my own and the FT’s pension contributions paid into a Sipp (self-invested private pension) instead. This would give me access to a greater range of investment choices, as well as greater ease of executing them. Investment platforms tend to have much whizzier app-based technology than the giant pension providers. However, Hunt is right to consult on these measures carefully.
While the theory of having a pot for life is brilliant, in practice, most of the cost of running giant company pension schemes is picked up by employers; fees are capped and the overall cost of investing is negligible. The fees charged by some of the consolidator apps whose adverts appear on the Tube are much higher by comparison — they have to cover the marketing costs, after all.
This worries former pensions minister Sir Steve Webb. “If we allow people to divert their pensions contributions elsewhere, we all know who will do so — the top earners,” he says. Indeed, there is likely to be hot competition as platforms compete to get those with the biggest pots to shift to them. Webb is concerned about what happens to the large majority who are left behind. “Suddenly, the bulk purchasing ability of the employer is undermined and the scheme becomes less viable for the provider because all the top earners have left,” he says.
Handled badly, this could lead to fees rising as investment choices and customer service levels slip. But greater choice will force competition in a stagnant market and keep the big company pension providers on their toes. So too will the consultation’s promise to “shift employer incentives away from low fees towards long-term pension investment performance”. The average worker is expected to end up with 11 separate pensions over the course of their working life, and this fragmentation helps explain why an estimated £27bn worth of pensions have been lost. A pot for life would reduce the admin burden for younger workers with a drawerful of paperwork from multiple schemes.
Separately, those starting their investment journeys have been cheered by news that the government will permit fractional shares to be held within tax-free stocks and share Isa accounts. This is a victory for common sense, and will boost investor engagement. In the 1980s, Margaret Thatcher inspired a generation of private investors with the “Tell Sid” campaign as millions snapped up shares in privatised British companies like BT and British Gas.
Forty years later, the chancellor may struggle to “Tell Sid to get investing again” by offloading the government’s stake in NatWest. Yet enabling younger investors to buy small amounts of expensive US brands like Apple, Amazon and Netflix, which form the backdrop to their everyday lives, will be a fitting modern-day equivalent.
Claer Barrett is the FT’s consumer editor and the author of ‘What They Don’t Teach You About Money’. claer.barrett@ft.com Instagram @Claerb
