What would a workplace pension ‘pot for life’ mean for employers?
Workplace pensions could be about to experience the biggest shake up since auto-enrolment, with the UK Government proposing the idea of a pension 'pot for life', where employees choose to have just one workplace pension scheme that moves with them when they change jobs.
From the point of view of a retirement saver, this could create more flexibility and engagement with their workplace pension. But for small and medium-sized businesses running workplace pension schemes, the prospect of ‘pot for life’ could also mean greater complexity. Let’s take a look at some of the potential pros and cons for your business and employees.
Why a ‘pot for life’?
People typically change jobs more often these days and can often end up with more than a few pension pots stacked up from different employers. This arguably makes it harder for someone to keep track of all their workplace pensions over time. They may also find it difficult to know what, if any, action they should take, such as consolidating their various pots.
By moving with an employee as they change jobs, a ‘pot for life’ would allow them to build up one workplace pension over their career, which in theory should make it easier to keep track and stay more engaged with their retirement savings.
‘Pot for life’ would also allow the employee to choose their pension scheme, instead of this decision being left to their employer. On the one hand this does give retirement savers more flexibility but, if they don’t choose a good scheme, they could end up worse off.
The big admin challenge
Making ‘pot for life’ a reality would of course take a huge amount of work and administration, as anyone reading this who works closely with payroll will be thinking already.
Some pension experts argue that ‘pot for life’ could eventually act like a bank account for your different employers to pay into[1]. But, currently, pensions don’t all have account numbers and sort codes like bank accounts, making them much harder to administer. And this issue is arguably one of the reasons why the number of small pension pots has increased in the first place.
Businesses might also end up having to pay for extra payroll functionality in order to send funds to employees’ pot of choice. This could be tackled by setting up something called a clearing house, but some industry experts also stress the time, complexity and cost required to make this happen[2].
A lack of appetite?
There are some question marks over the current appetite amongst pension providers and employers for this level of change to workplace pensions. If auto enrolment is anything to go by, it appears that most employers choose only to meet the minimum requirements when it comes to selecting a scheme and assessing contributions.
And while ‘pot for life’ would bring clear benefits for pension providers, who find small pots a growing problem, the industry has been reluctant to build the application programming interfaces (APIs) to payroll software which would be necessary to make pot for life work.
Ultimately, however, if ‘pot for life’ does go ahead it will be a legal requirement for employers and providers, with employees given the right to choose their pension scheme.
Employee benefits
Based on our experience, the number of employers who consider a workplace pension an employee benefit is pretty small in comparison to those who simply comply with basic requirements. But turn this on its head and things look very different from the employee’s perspective, with research showing that 90% are influenced to remain or change jobs based on their workplace pension.[3]
Perhaps ‘pot for life’, despite the challenges it may bring, could help employers become more engaged with workplace pensions as an opportunity to attract and retain the best talent.
[1] Source, [2] Source, [3] Source