Conservative MP Anthony Browne has brought a Ten-Minute Rule Bill in Parliament, proposing that employees be given the right to choose their own pension plan and have their employer pay into it.
Browne, who is a member of the Treasury Select Committee and chair of the Conservative backbench Treasury Committee, claimed that this would help address the small pots issues in workplace pensions and boost engagement with retirement savings.
He said: “There are many reforms needed to restore our pension system, but there is one simple change that will encourage pension savings that won’t cost the Treasury a penny.
“Giving employees the right to to require that their employer pay their pension contribution to a pension of their own choosing, rather than it having to go into a pension chosen by the company. If you move jobs, you can keep the same pension, and get the employer to pay into it, rather than being forced to set up another one.
“It is a small reform that could, over time, be revolutionary, enabling workers to build up a ‘pot for life’ of their own, so they can manage it more easily, reduce costs, and know how much exactly they have.”
He pointed out that the pension system was designed in an age when a majority of people had one employer for life. Now people switch employers regularly with the average person having 12 jobs over their lifetime. Most of those jobs will come with pensions, and so people build up multiple small pensions.
The Pension Policy Institute estimates that in 2020, there were eight million deferred pension pots, holding tens of billions of pounds of savings. Many of them are small with the Association of British Insurers calculating there are 2.2 million deferred pots with under £1,000 in them.
The Department of Work and Pensions recently set up a Small Pots Working Group to look at potential solutions to this issue in more detail. Current models under investigation include the ‘pot follows member’ approach, and setting up ‘auto-consolidators’. Browne says both solutions could co-exist with his proposal, also known as the ‘lifetime provider model’. A model similar to this exists in both Australia and New Zealand, however critics says this could create additional paperwork for employers who would have to manage payments into many different pension schemes.
Writing on Conservative Home, Browne stated: “Having many small pension pots creates complexity that discourages people from saving. I know it did me: in a part-time job before being elected, I was urged to set up yet another new pension, but I opted out because its value would be small and I couldn’t bear the thought of managing a tenth one.
“On paper, the Government has given people the right to consolidate their pension pots, but the reality is different. It is usually a bureaucratic nightmare, with pension funds doing nothing to make it easy, and often it is impossible. I have two pensions with the same provider, Legal and General, and I am banned from merging them.
“The Government is launching the pensions dashboard this year, which will show people all their pensions in one place – a very welcome development. But it doesn’t stop millions of pension pots proliferating in the first place.”
Browne’s proposals have been welcomed by the industry. Hargreaves Lansdown head of retirement analysis Helen Morrissey said: “We would like to thank Anthony Browne MP for raising this important issue – it is an approach Hargreaves Lansdown has supported for many years. We believe that it is a vital part of the puzzle to drive up engagement with pensions, especially with so many people saving in defined contribution pensions.
“It could make a demonstrable improvement in the number of small pension pots we see in the market and people would be less likely to lose track of what they have.
“We cannot wait until retirement age before we engage people with their pension savings and strengthening the relationship between the individual and their pension provider will only help with this.”