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Anthony Browne is MP for South Cambridgeshire, the Chair of the Conservative backbench Treasury Committee and a member of the Treasury Select Committee.
When Labour came to power in 1997, one of the legacies of the Conservative government was a well-funded private and occupational pension system.
It meant that millions of pensioners could look forward to a comfortable retirement, and it was the envy of the world: as an economics journalist at the time, I wrote about how other western nations were far less well prepared than us for an aging society.
But Labour looked on it as a treasure chest to be raided. One of Gordon Brown’s first acts as Chancellor was to scrap advance corporation tax – basically a £5bn a year tax hike on pension funds.
We warned it would damage our occupational and private pension system, and that is what happened.
The Conservatives, elected in 2010, are more naturally supportive of people saving for their own retirement rather than just relying on state pensions. Autoenrollment, introduced in 2012, has been a huge success: workplace pension saving amongst eligible employees increased from 55 per cent when introduced to 88 per cent in 2021.
But Treasury officials have also always had a beady eye on tax relief for pension savings, and in the age of austerity, George Osborne brought in the lifetime allowance, and cut tax relief in other ways. These have reduced the incentives to save for retirement, and lead to the absurdity of doctors retiring early because they will be poorer if they work.
There are many reforms needed to restore our pension system, but there is one simple change that will encourage pension saving that won’t cost the Treasury a penny.
I have a 10 Minute Rule Bill in Parliament tomorrow to propose it: giving employees the right 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.
Then 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.
The problem is that our pension system was designed in an age when people had an employer for life. Retiring after 40 years of service at one company, they would leave with a watch and a gold-plated pension.
Now people switch employers regularly; the average person will now have 12 jobs over their lifetime. Most of those jobs will come with pensions, and so people build up multiple small pensions. I am in my mid-fifties, and am now on my ninth pension.
The problem might seem arcane, but the scale is huge, and it affects the welfare of millions of people in retirement. 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: the Association of British Insurers suggests there are 2.2 million deferred pots with under £1000 in them.
The problem is certain to grow exponentially. The PPI estimate there will be 27 million deferred pension pots by 2035.
This causes many problems, which are recognised by the Government and industry. With so many pots, it is easy for people to lose them. It is estimated there are now 1.6 million pensions that are lost – one estimate puts the lost pension saving at an astonishing £36bn.
Small pots also come with comparatively big charges, which can erode their value quite literally to nothing. Having many pots, it is difficult for savers to manage their pensions effectively. It can also be loss-making for pension companies.
Probably most importantly, the complexity 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.
Ministers launched the Small Pots Working Group to look at solutions, and in January they began a consultation. The proposals include auto-consolidators, that automatically sweep up small deferred pots into one pot; and a pot-follows-member system, whereby if you move job, your previous pension will be moved to your new employer.
Those are both welcome suggestions, and not incompatible with either each other or my proposal; there is no one single solution.
My proposal would allow people to build up a pot-for-life, and they would choose the provider. When they start a new job, they would be able to direct their new employer to pay both their own and the company contribution to this pension, rather than the default pension scheme used by the company.
(It is very important that the employer would have to make a contribution of equal value to the one they make to other employees, so that people who have their own pension are not penalised.)
In effect, it allows employees to opt out of their company pension scheme without losing pension contributions. If you have multiple jobs, all your employers would pay into your same single pension (which couldn’t happen with the pot-following-member system).
There is nothing new about my proposal: other countries like Australia and New Zealand have successfully implemented this model.
It is an elegant solution that puts pension members at the centre of the system rather than the employer. As an opt-out system, the change will be gradual and the effect on existing pension schemes incremental. There are lots of details to sort out, and it probably could not be used for employers with defined benefit schemes.
As it grows, eventually the scheme could be made automatic if the Government wanted it to be the solution to the small pots problem, as they have done in Australia.
I have had meetings with industry about it, and one of the main concerns raised is the increased administrative cost to employers of having to pay contributions to multiple schemes. But all companies have payroll systems that pay each employee’s salary to their separate bank accounts; they could likewise pay pension contributions to separate pension pots.
The long-term aim is that it would be the norm for pension savers to have a single pot for life, making it easier for them to ensure a comfortable retirement. It is a good Conservative policy that will help us get out of our pension muddle. I look forward to proposing it to Parliament tomorrow.