I was really very pleased to read about the Government’s interest in allowing employees that are automatically enrolled to choose where their pension is invested. Alongside many others, it is something I wholeheartedly support.
In the old days of defined benefit company pensions it was right for employers to choose where that scheme was invested. After all, the employer was responsible for both the mortality risk and investment risk for such collective schemes.
However, the recent trend towards company pensions being defined contribution schemes – which will only be further accelerated by the rollout of auto-enrolment – should surely come with the freedom to choose where to invest resting squarely with the employees. With a defined contribution pension, the mortality risk and the investment risk lies squarely with employees, not their employers. The shoe is on the other foot.
Employers do not tell employees where they should have their personal bank account or where they should invest in Isas, bonds or anything like that. We would be appalled if they did. So why should employers be responsible for telling their employees where they should invest their pension savings? Indeed, why would they even want to?
“Why should firms be responsible for telling employees where they should invest their savings? Indeed, why would they even want to?”
With all this in mind, a change to the auto-enrolment rules to allow employees to choose where their pension funds are invested would be a very sensible move. What is more, it would be wholly in line with the Government’s introduction of the freedom of choice regime. It would also make sense of the Lifetime Isa, due to be launched next April, and the so-called Workplace Isa that many in the industry think will follow it soon after.
On their own, these new products seem too much like a confusing alternative pension system but with employees having the right to choose where they invest for their long-term future they would simply represent another useful option for them.
If the future of 21st century workplace pensions is to be employee-centric rather than employer centric, as we saw in the last century, I would be wholly in agreement with the Centre for Policy Studies’ Michael Johnson and join him in calling for yet more freedom and choice for employees.
I do hope our pension system, powered by auto-enrolment, can make this leap into the 21st century and the wishes and needs of employees can be put at the heart of such a future system. The Government appears to have the vision to look at such a radical change and it is to be applauded for that. I hope the vested interests of the businesses of the past do not get in the way of the pension system of the future. On that, I suppose only time will tell.
Steve Bee is director at Jargonfree Benefits