Making auto-enrolment more flexible is key to getting more advisers involved in workplace planning, experts are arguing, but fears remain over the impact of removing default funds.
Auto-enrolment is based on the idea that people are apathetic about pensions so employers and government must step into help them. If people are not going to decide where they invest savings, then the decisions others make for them gain greater weight.
Discussions about auto-enrolment tend to focus on the importance of default funds in determining retirement outcomes, given the limited choice over where a member can put their contributions once enrolled in a workplace scheme.
Currently a member can either opt out of their workplace scheme and lose valuable employer contributions, or ask for their money to be put into a different scheme entirely, but this is at the discretion of the employer.
Some are arguing such defaults stop people taking more active decisions like seeking advice.
Hargreaves Lansdown senior pensions analyst Nathan Long says auto-enrolment reform could spark better access to IFAs and improve buy-in.
Long identifies three related problems with the current AE system: lack of member engagement; lackluster efforts by workplace pension providers to engage with members; and the conservative management of default funds.
He says: “A way to solve all the above is to allow members to choose where their contributions go and this would happen if members had to actively choose their provider.
“People in the 40 to 50 age bracket could really benefit from this and it would force workplace providers to up their investment proposition as they would have to compete for pension contributions.
“Financial advisers add value to people when there is a choice and could help members find better investments than what is offered in a default fund.”
Trades Union Congress policy officer Tim Sharp, however, argues there is no evidence choice works in pensions.
He says: “We know that people do not feel confident about being DIY investors. Also there is no evidence that if people get more engaged and choose their investments they will get good outcomes.
“For the vast majority of members it is good to be enrolled in well-run schemes and put in well-constructed default funds.”
Cervello Financial Planning director Chris Daems notes that while more choice would benefit advisers, he is skeptical that it would be good for members.
He says: “Making members take more choice will benefit advisers. However, I’d suggest that we should make legislative change not on what is right for the adviser but what is right for the client.
“There’s nothing to state that more member choice will drive up member engagement. In fact most social psychology studies point to the fact that limited choice means that options become more ‘selectable’ and too much complexity means more confusion.”
AJ Bell senior analyst Tom Selby sees merit in flexibility but warns it has to be handled carefully.
He says: “The idea of introducing member choice into the AE framework is an interesting one which I expect to resurface this year. It’s certainly one I’d imagine a Conservative Government could potentially go for.”
However he adds: “If you are going to go down this route you need to ensure an extra burden is not placed on employers and members are not put in danger.
“Clearly the auto-enrolment space is wrapped in certain protections which would not exist if members chose to divert their contributions to, say, a Sipp.”
The debate between choice and paternalism will eventually be made redundant according to The People’s Pension director of policy and market engagement Darren Philp.
He foresees a happy marriage between free decisions and compulsion emerging in the long run.
He says: “I believe pensions will become more individualised. A few years ago we were talking about pot follows member but in the future I see pension follows member.
“Over time pensions will become a bit like a bank account which is something you can take with you from employer to employer. This model works in other countries like Australia which has compulsory savings and workplace schemes but members can choose different providers.”