Pensions minister Baroness Ros Altmann has torn apart two key pillars of her predecessor’s reform agenda, raising serious questions about the time wasted by both Steve Webb and Government officials developing the policies.
Last week, Altmann announced the implementation of both pot follows member – a reform designed to prevent vast numbers of stranded pension pots building up as a result of automatic enrolment – and defined ambition had been pushed back to give providers and Government officials breathing space to deliver the existing reform agenda.
But with the Government refusing to commit to a timetable for introducing the changes, and experts criticising the previous administration for neglecting communication of both the state pension changes and auto-enrolment, is Webb’s legacy under threat?
Dead in the water
Speaking to Money Marketing, Altmann insists the issue of proliferation of small pots has “not been shelved indefinitely”.
However, she repeatedly refused to confirm whether or not the reform, or Webb’s defined ambition agenda, would be introduced before the 2020 general election.
She says: “It would be unwise to proceed with it all now, and I also believe the freedom and choice reforms fundamentally change the original idea that defined ambition was based on. It is important when things change to take stock and then look again.
“I can assure you these reforms are not shelved indefinitely, and I can also assure you that I know and the Government knows we have to do something about the small pots that are building up and stranded if people move jobs. We do absolutely have to have a system that will help people manage their lifetime savings in one place.”
However, a source close to the Department for Work and Pensions says: “Pot follows member is dead in the water. Officials at the department never liked the initiative and, with a new minister in office, they have pushed back and convinced the Government to go back to the drawing board.”
Webb insists his legacy as pensions minister should be judged on the success or failure of auto enrolment, the single-tier state pension and the freedoms introduced in April this year.
He adds both pot follows member and defined ambition could yet be resurrected once strains on Government and industry resources have eased.
Webb says: “Ros has been very clear that this isn’t a policy reversal – she has never said she wants to get rid of pot follows member entirely.
“The capacity of a government department is finite and falling, so they have sat down and set out what they absolutely have to do.”
Webb was belligerent in his pursuit of defined ambition despite experts dismissing the merits of the policy and questioning whether employers scarred by defined benefit deficits would actually be willing to take on extra pension risk.
Under one of the models of defined ambition, collective defined contribution, members’ assets are pooled rather than being retained on an individual basis. When a member retires, their income is then paid from the asset pool, meaning they do not need to buy a retirement income product.
London Business School executive fellow David Pitt-Watson has written several reports on CDC and claims the model can deliver up to 40 per cent higher retirement incomes versus individual DC.
He says: “We have been left with an incomplete pension reform. Quite rightly the Government has said annuities are incredibly expensive and that consumers shouldn’t be forced to spend all their money on that.
“But if you abandon CDC how can you expect people to buy an adequate pension in this country. It’s really frustrating the Government seems to think they no longer have the bandwidth for it because they need to do it.”
The decision to abandon two of Webb’s pet projects has drawn criticism about the DWP’s use of resources during the last Parliament.
Hargreaves Lansdown head of pensions research Tom McPhail, who was heavily involved in the pot follows member project, says thousands of DWP hours were spent on the proposals during Webb’s tenure.
He says this could stretch to hundreds of thousands of hours when you include time spent by the industry. McPhail says: “I don’t know what you’d cost DWP officials’ time at, but it won’t have been cheap. Imagine if all those resources had been spent developing interactive websites and apps to communicate the state pension reforms? Webb did some good stuff in office but, in the end, he got a bit carried away.
“If he’d spent that last year building robust communications systems for the new state pension instead, we would be in a better place now.”
Aviva head of financial research John Lawson agrees: “The DWP has very limited resources, and making sure the state pension works and is communicated well to people is important because that makes about 45 per cent of the income of retired people.
“Auto-enrolment is also vital, given there are still over a million employers to enrol, and we’ve also got to increase contributions to 8 per cent – that’s a big challenge.
“The DWP will have to have its wits about it to keep up with all that.”
The sudden disappearance of pot follows member could pave the way for the industry to solve the small pots problem through the creation of a so-called “pensions dashboard”.
The idea, long favoured by many in the insurance sector, would allow savers to virtually aggregate their pots in one place without ever having to go through the process of actually transferring their pot from one provider to another.
Lawson says: “Once we have virtual aggregation we can improve the pension transfer system that sits behind it. The customer could drag and drop their pots into one place on their own if they wanted to.
“We need to get transfer times down to single days and third-party administrators are clearly struggling with that, but a virtual aggregator is a more modern evolution of the solution than trying to build a brand new banking infrastructure to transfer money between savers’ accounts without them even knowing about it.”
Has Ros Altmann destroyed Steve Webb’s legacy?
Last week, pensions minister Ros Altmann unceremoniously wielded the axe on two reforms pursued vigorously by her predecessor, Steve Webb. Both pot follows member and defined ambition were unpopular with certain sections of the industry from the start.
Providers argued creating a system where pension pots are automatically transferred when a person moves jobs would be costly to implement and could see members lose out if they moved from a low-charging scheme to a high-charging scheme.
Many were also sceptical that employers would have any appetite to take on extra pension risk, despite Webb’s protestations that companies were in fact interested in DA. While concerns about PFM were probably driven by the self-interest of companies desperate to hold on to members’ cash, the introduction of pension freedoms and possible reforms to tax relief mean the complaints of the industry at the volume of change are increasingly being heard at the heart of Government.
But what of Webb’s legacy? I had a brief conversation with him about this while on a train returning from the NAPF conference in Manchester.
Webb argues the key successes during his five-year term – during which the former Liberal Democrat MP was regularly lauded for his achievements – were introducing the flat-rate state pension, auto-enrolment and the pension freedoms.
However, only the single-tier reform was truly his, and many would say both Webb and his department became unnecessarily sidetracked from the key task of ensuring the policy – alongside auto-enrolment – landed smoothly.
History may judge Webb as a great reforming pensions minister who helped reignite a savings culture in the UK.
But if auto-enrolment falls apart when small and micro firms reach their staging dates and the new state pension is introduced amid a cloud of confusion, the time wasted on two policies which never saw the light of day will not be remembered favourably.
Tom Selby is head of news at Money Marketing
Carl Lamb, managing director, Almary Green
Whenever anybody new comes on board, they are not necessarily going to continue on the same course, and there is a recognition that the previous government was pushing ahead too quickly with some of these changes. From the beginning I have thought we could have a total disaster on our hands with auto-enrolment if we are not careful, so it is right to draw breath and ask what exactly is it we are trying to achieve.
Nick Bamford, executive director, Informed Choice
When you are in power you can achieve things, but when you lose out someone else will inevitably come along and change that. Steve Webb had a lot of respect from the profession and some of the things he said still make sense, like the abolition of the lifetime allowance, so I hope that still comes to pass.