Background and rationale

To coincide with the Chancellor's Autumn Statement on 22 November 2023, the DWP has issued a call for evidence on a lifetime provider model or a ''pot for life''.

The pot for life could be part of the solution to an issue with which the pensions industry has been wrestling for many years – namely that of employees who move jobs frequently, who build up a succession of small pension pots with different providers and who forget, or otherwise lose touch with, the various pension schemes into which they have been enrolled. It is estimated that one in 20 people have "lost" a pension in this way, and that more than £26.6 billion is sitting in these forgotten pots.

The average number of pots across an individual's working life is 10 pots. 

Note that a pot for life system, if implemented, would potentially reduce the numbers of small pots that are built up in future. However, it would not address the issue of the many small pots that already exist. A government consultation response, published on the same day as the Autumn Statement, confirmed that the government will introduce a multiple-default consolidator solution to deal with these ''historic'' small pots. Under this solution, small pots will be automatically consolidated into one of a small number of schemes specifically authorised to act as a consolidator. The details relating to the design and delivery of this solution are yet to be decided and an industry delivery group will be established to work with the government on these aspects.

Pot for life explained

At its most simple, a pot for life system would require an employer to contribute to a pension arrangement chosen by the employee, rather than one selected by the employer, meaning that pension pots could move with employees as they change jobs during their working lives. 

The pot for life proposal is part of a long-term vision for workplace pension saving in the UK, which is intended to improve outcomes for savers. Multiple pots make it harder for individuals to engage with their pensions, to understand the totality of their savings and to make decisions about retirement. Multiple pots also increase the likelihood of individuals losing valuable pensions savings. 

The government's vision for workplace pension saving extends to the further development of Collective Defined Contribution (CDC) schemes and this call for evidence on pots for life also requests views on the suitability of lifetime provider CDC schemes and on encouraging the use of CDCs for auto-enrolment compliance. The government sees a synergy between a lifetime provider model and the further development of CDCs because an individual's retirement savings will remain invested in the one place for longer. This will also facilitate investment in productive finance.

Some pros

The government's proposals signal a definite shift from the current position in the UK and it seems that many savers would welcome this. One survey shows that 76% of savers would positively consider a pot for life.

Some potential advantages of a "pot for life" system are: 

• Convenience: 55% of respondents to the survey mentioned above reported that "convenience" would be the primary driver in their decision to choose a pot for life. A pot for life system would be much easier for an individual to navigate than a system of multiple pots. Total retirement savings would be more easily visible and the system would minimise the risk of a pension being "lost" and never claimed. 
• Power to choose: A "pot for life" solution would allow employees to choose a retirement fund which best suits their needs, such as a saver with an increased risk appetite choosing a provider which offers access to a wider range of investments. It is hoped that the ability to choose will make employees feel that they have greater control over their pensions, and so will encourage them to engage more actively with their personal finances. 

Some cons

A pot for life system will bring with it a number of challenges for employers and the risk that outcomes for savers may not be improved.

For employers, there is the prospect of a significant additional administration burden because employers will be required to pay pension contributions into many different pension arrangements. There is also the concern that employers will no longer feel incentivised to provide any pension benefits over and above the minimum required by legislation. 

Also, a pot for life system will bring with it a number of risks which could jeopardise outcomes for savers. These include: 

• that an individual will make poor financial decisions, such as opting for high-risk funds; 
• that greater personal autonomy will increase the likelihood of scammers targeting individuals;
• that scams and aggressive marketing targeting individuals could actually cause individuals to further disengage from pensions and maybe increase opt-out levels; and 
• that the absence of a strong employer link will make it more difficult to monitor auto-enrolment compliance and to follow up on delayed and missing contributions. 

In the circumstances, a robust regulatory and governance framework will be needed to ensure that savers are protected. We would expect that lifetime providers will need to be authorised as such, and that the authorisation regime will address and mitigate these risks. Given the overall focus on consumer protection across the financial services industry, it is likely that the onus will be on the lifetime provider to put appropriate precautions in place.

Conclusion

The window to respond to the call for evidence closes on 24 January and the jury is out on whether the lifetime provider model really could improve outcomes for savers given some of the potential disadvantages mentioned above.

If the pot for life solution is progressed, there will be much work to do for scheme providers, regulatory bodies and the government alike – establishing an ecosystem which is robust and secure enough to support the proliferation of an individualist pension fund model will be a challenge. As seen with the pensions dashboards project, reform and innovation on this scale can take a long time to come to fruition. The expectation in the industry is that a pot for life system will take many years to establish. 

We will continue to provide updates as these proposals progress. If you would like to discuss anything raised in this article in more detail, please do get in touch with a member of the Dentons Pensions team or your usual Dentons contact.