Context

Small pension pots have negative consequences for savers in the form of lost pots, lower investment returns and higher charges. Deferred small pension pots are likely to be a growing issue as a result of automatic enrolment into workplace pensions and a highly mobile labour market.

Proposed Government reforms around member choice (allowing savers to choose which pension pot their employer puts contributions into) and stapling (in which a saver’s pension pot is with the pension provider of their first employer, unless they decide otherwise) are intended to address this problem, providing a consolidated ‘pot for life’ rather than creating a new pot with each new job.

The intention is that these reforms should improve decision-making and outcomes for savers, as well as direct more savings towards productive finance assets by improving economies of scale around how pensions are invested. However, what this could mean for the market for savers, employers and providers is not yet clear.

The study

This study was undertaken on behalf of the ABI to:

• determine if the reforms would be likely to meet government objectives and
• understand the likely impact on wider pensions policy, including detrimental unintended consequences for some groups of savers.

There were three main elements to the study design:

• A survey, via Censuswide, of representatives from 1,002 employers who had responsibility for decisions around defined contribution pensions at their company, using soft quotas to capture a mix of sectors. The survey asked about perceptions of member choice and stapling reforms, their potential behavioural response, and potential costs of implementation.
• Modelling, based on the survey data, of the potential impact of member choice reforms on the likely effect of pension report on individual pots. This involved developing a pensions savings tool which varied assumptions (investment return, costs, proportion of earnings saved, the starting value of the pot, and time to retirement).
• A review of evidence and data from markets for other retail financial products, from the UK and elsewhere, about how the reforms might impact savers and the productive finance agenda.

Key findings

Employer expectations about the impact of reforms

• Reduced interest in the quality of the workplace pension scheme they chose for employees who remain (reported by 57%).
• Difficulty assessing the quality of the pension schemes they would be contributing to (65%).
• Increased payroll provider costs (63%), an extra 5 hours per month (28%) or 16,000 full-time equivalent employees across the economy, and additional salary expenditure of £550 million per year.
• The potential to give employees the freedom to choose a pension that works for them (61%).
• Worse pension outcomes for employees (62%).

Evidence from markets for other retail financial products based on member choice

• Only a minority of savers (5-8%) would be likely to switch.
• It is not certain that consumers would act in a way that increased their returns or reduces their costs, rather than for convenience and simplicity.
• Those who engaged would be likely to be higher earners with bigger pots.
• Costs could rise overall as a result of a higher marketing spend by providers to attract clients with the bigger pots.

Impacts on productive finance from member choice reforms

• Stapling could lead to reduced inflows and outflows of members and capital.
• Member choice would likely drive greater disruption, at least initially, as people switched schemes or providers.
• Rates of switching, and types of schemes that members are allowed to switch into.
• If demand from savers drives better returns, or is based on other factors such as convenience.

Points to consider

Methodological strengths or limitations

• The sample is not necessarily representative of the picture for all employers nationally.
• The findings are highly relevant, but largely descriptive rather than analytical. The authors note that these are initial findings that warrant further exploration.
• The modelling is necessarily based on a range of assumptions, the rationales for which are not given.

Applicability

• The findings should be of particular interest to policymakers and employers.

Relevance

• The study is highly relevant given the proposals for pension reform.
• The study is also relevant given the Money and Pensions Service’s national goal, set out in the 2020 UK Strategy for Financial Wellbeing for five million more people by 2030 to understand enough to plan for and in later life.

Generalisability/transferability

• There is likely to be some transferability of the learning from the study to other similar markets, where there is automatic enrolment into defined contributions workplace pensions and where these are limited to employer provision.