Looking to the future: Greater member security and rebalancing risk – a call for evidence
On 22 November 2023, the DWP issued a call for evidence on the implementation of a “lifetime provider model” for workplace pensions, how collective defined contribution (“CDC”) schemes could support members, and combining the two approaches over the long-term to benefit members.
This follows a consultation on a proposal to resolve the issue of deferred small pots issued in November 2023 to which we also responded. A copy of our response to that consultation is available here.
In this response
- Pensions are traditionally an important part of the employment benefit package. Moving to a model where employees have a right to choose their pension scheme to receive employer pension contributions would, in our view, represent a fundamental move away from this. We agree with the comment at paragraph 133 of the call for evidence that there should be exemptions to the lifetime provider model where an employer provides a better offering, such as a defined benefit (“DB”) scheme. There are some less tangible benefits that employers can currently provide, such as regularly monitoring the value of their workplace scheme for employees (eg reviewing the appropriateness of the default fund for active members). We suggest that careful thought should be given to ensuring these benefits can continue to be provided, as well as considering the wider “cultural” impact that a lifetime provider model might have on the value of pensions as an employment benefit. If employers are perceived as less connected with or responsible for the pension benefits offered to employees, could this have a “levelling down” effect on employer contribution rates? This issue was highlighted by the Small Pots Working Group, and in our view it would be useful to build on that work to better understand these risks.
- Our comments are given primarily in the context of the trust-based pensions market. We note that the intention is for this lifetime provider model to work across both the contract and trust-based sides of the market, and specific considerations will be needed for each. For example, we expect the mechanics of employers paying contributions into trust-based and contract-based lifetime providers may vary. The legal basis for any transfers into lifetime providers (for example, to consolidate previous pension pots) would also differ depending on whether the transferring scheme is trust-based or contract-based. As the DWP has identified in relation to the default consolidator solution, legislative changes would be needed to enable contract-based schemes to transfer benefits without member consent.
- Whilst we recognise that some lessons may be learnt from the workplace pension models used in other countries, such as Australia, we would highlight that any UK model would need to reflect the specific characteristics of the existing UK pensions market. This includes the number and variety of schemes, including single employer trust-based schemes, and automatic enrolment requirements.
- This proposal is intended to build on reforms already announced, including the multiple default consolidator solution for small pots, the Value for Money framework, the development of CDC schemes and pensions dashboards. These changes could significantly alter the pensions landscape in the UK, alongside the other reforms proposed during 2023, such as requiring all defined contribution (“DC”) schemes to offer decumulation products and services, and the Government’s overarching aim to have a small number of schemes in the DC market. While we welcome the work being undertaken to address the issue of multiple small pots and to improve member outcomes, we suggest that the way forward on a lifetime provider model may become clearer as these other changes evolve.
Question 1: What are the key considerations to take into account before deciding the process to implement a lifetime provider model and what elements would need to be in place?
We broadly agree with the considerations set out in paragraphs 122 to 143 of the call for evidence. In our view, key considerations include:
- If members are defaulted into a lifetime provider because they have not made an active choice, they should not be worse off. All lifetime providers would therefore need to meet good quality standards.
- Assessing the value of a lifetime provider scheme is complex because of the long-term nature of the model. The provider would be chosen at one point in time (possibly early in the member’s career) and this choice may not be revisited, even where the member moves employers (for example, due to a lack of member engagement). The quality assessment would need to reflect the full member journey, including value during periods of deferral and during decumulation. This is likely to make comparisons between schemes more challenging and less reliable as a measure of value.
- Individuals would need clear and accessible information about the value offered by lifetime providers beyond what schemes are currently required to disclose, and beyond the proposed Value for Money framework. For example, the proposed Value for Money disclosures are not designed to be used by individual members to compare and select their own schemes. However, we expect that in any event it would be difficult for individuals to make meaningful comparisons between schemes for the reason above.
- An authorisation and supervision regime for lifetime providers could help set appropriate standards and promote good member outcomes so that members are not stapled to schemes offering poor value. This could build on the current authorisation regime for master trusts, but, in our view, would need to specify good value benchmarks rather than simply minimum acceptable standards. It seems to us that the lifetime provider’s value should be assessed objectively by a regulator, rather than determined by trustees or scheme providers, given the difficulties identified above with comparing value against other schemes.
Issues for employers
- The model should be designed to protect employers to the greatest extent possible from additional costs, administrative burdens and liability associated with paying pension contributions to multiple schemes, without compromising member security. Additional costs and liability could direct employer resources away from pension contributions and other valuable pension benefits such as communications and education/guidance.
- In our experience, issues with employers paying pension contributions late is relatively common, even where the employer participates in only one pension scheme. We expect that this would be exacerbated if employers were required to contribute to multiple schemes. The process for paying contributions to lifetime providers would need to be as simple and straightforward as possible to facilitate compliance (see “issues for payroll providers” below).
- We note that changes would be required to the existing automatic enrolment legislation. In particular, changes would be needed to ensure that lifetime providers qualify as automatic enrolment schemes, and to reflect that the choice of scheme is not within employers’ control. For example, while employers would need to ensure that contribution levels are sufficient, it may not be practical or reasonable to require employers to verify for themselves that multiple lifetime provider schemes used by employees satisfy other automatic enrolment requirements.
- Employers should be encouraged to provide a more generous scheme in place of a lifetime provider.
“Own trust” occupational schemes and exemptions to lifetime providers
- We agree there would need to be exemptions in circumstances where an employer provides a better offering than the lifetime provider (paragraph 133 of the call for evidence). However, there are practical considerations in how this is assessed to ensure that the employer’s offering is genuinely better value. Safeguards for members could include objective value measures, or a requirement for employees to opt-in to the employer’s scheme rather than being enrolled by default.
- Where an employer provides an “own trust” scheme in place of lifetime providers, consideration should be given to what happens when the member leaves employment. Consolidating these deferred pots into an automated consolidator or lifetime provider might not be possible (eg without member consent where there are DB benefits) or could result in the loss of valuable benefits such as tax protections.
- It would not be feasible to use “own trust” schemes established by single or connected employers as lifetime providers, since receiving contributions from new employers would pose legal and practical issues. We assume this is not envisaged by the DWP, but it would be helpful to confirm this point.
Issues for payroll providers
- As the DWP recognises, the impact on payroll providers of directing pension contributions into multiple schemes is a particular concern. It will be important to understand payroll provider capability/integration with existing HR systems to gauge the impact of this proposal from an operational perspective. We expect that this is likely to cause practical issues even if the lifetime provider model is established in the context of a more concentrated market with a small number of schemes (paragraph 132 of the call for evidence).
- Any additional cost of the extra payroll complexities will be borne by employers (and perhaps ultimately members, if it is offset against pension benefits as mentioned above). One option, as suggested in the consultation responses discussed at paragraph 9 of the call for evidence, might be to expand the role of the central clearing house so that it receives contributions from employers and directs them on to schemes. In this case, an employer would only need to have a relationship with the clearing house, rather than multiple lifetime providers. However, this raises other issues, including the cost and complexity of providing this service, who would fund it, and liability for incorrect payments/administrative errors. Using a clearing house in this way could also delay transfers and investment of contributions in the member’s scheme, potentially providing poor value for members.
- We understand that there are some “clearing house” type services currently commercially available, where providers direct employer contributions to a third party who then pays the contributions into different schemes. There may be lessons to learn from these existing services.
Buy-in from lifetime providers
- The appetite for the lifetime provider model from the types of scheme and providers likely to act as lifetime provider vehicles, such as authorised master trusts and large personal pension providers, should be taken into account. As the DWP will appreciate, their support and participation will be vital to the success of the model.
Addressing the stock of existing deferred small pots
- The lifetime provider model could help prevent the creation of new small deferred pots, but it could also have a role in reducing the number of existing deferred pots. As mentioned in our general comments above, the pensions landscape may have altered significantly before the lifetime provider model is introduced, with the number of pots already greatly reduced. But there may still be a need to deal with larger deferred pots (eg above £1,000), and/or to combine consolidated pots with a lifetime provider pot. If the intention is to transfer existing pots to the lifetime provider, then thought will need to be given to the legal basis and mechanics for achieving this (see our general comments above).
Question 3: What are the other considerations and building blocks that need to be in place before moving to a single lifetime provider, including any transitional arrangements?
- As set out in our response to question 5 below, several existing policy developments should be in place before moving to a lifetime provider model. In particular, we agree that it seems the pensions dashboards infrastructure could support the architecture needed lifetime providers, and pensions dashboards should be available and “bedded-in” as a first step so that a lifetime provider model builds on that existing work.
Central architecture/clearing house
- We agree it is important that the model is designed so that it can operate without employee engagement, with employers being able to access necessary records via the central architecture / clearing house. Consideration will need to be given to how this record is created, where the information is sourced from and how it is updated.
We have also addressed this question in our general comments and our response to question 1 above.
Question 4: What are the advantages and disadvantages of moving to a member-led lifetime provider model prior to considering introducing a default lifetime provider model?
We consider there are disadvantages to using a member-led lifetime provider model before introducing a default lifetime provider model:
- this model would differ in important aspects to a default model. It would require member involvement and we expect that take-up would be relatively low, given that member engagement with pensions is low. The more engaged members may tend to be members with larger pots, which would not be representative of a default model. It might therefore not be an effective test for aspects such as the clearing house capability
- it would introduce complexities for employers required to operate their existing workplace pension model alongside a member-led lifetime provider model
- we also expect that trialling a member-led model would require much of the infrastructure for the default model to already be in place, and potentially legislative changes eg to automatic enrolment requirements. Providers may be unwilling to invest in that infrastructure given the likely low member engagement
- finally, there is also the risk that, should the DWP decide not to go ahead with the move towards a lifetime provider model, members already in lifetime providers may be left with unsuitable pension arrangements.
There are also some potential advantages, such as:
- a reduction of new small pots in the interim
- encouraging more engagement from members with their pensions
- the opportunity to trial some logistical aspects of the lifetime provider model (eg employers paying contributions into multiple pension schemes).
As mentioned above in our response to question 1, there may be existing products in the market from which lessons could be learnt before moving to a default lifetime provider model.
Question 5: What is the right timing and sequencing of these potential changes? Which part would best be implemented first and why, or should any be implemented concurrently?
We agree that a lifetime provider model should build on existing policy developments as far as possible (paragraph 128 of the call for evidence). We suggest that a lifetime provider should be implemented only after pensions dashboards, the new Value for Money framework and default consolidators for existing small pots (including the central clearing house) are established and bedded-in. As discussed in the call for evidence, the lifetime provider model should draw on the technology and experience of these policy developments, eg the dashboards infrastructure could support the architecture needed for a lifetime provider model. Developments like consolidation and data standardisation will also have a significant impact on the pensions market and wider industry. The lifetime provider model would need to be re-evaluated in the context of, and designed to fit, that new landscape.
However, it might be that a lifetime provider model is established before CDC becomes part of the pensions “competitive landscape” (paragraph 158 of the call for evidence), and that these models develop together. We can see that a lifetime provider model could encourage development of a whole of life CDC market (and vice-versa) by providing greater scale and longer-term active contributions than traditional workplace DC schemes.