A recent development in the U.K. pension market to give British workers a ‘pot for life’ could reduce the quality of retirement plans that are already in place and create administrative challenges, says Adam Bexson, senior corporate pension consultant at Verlingue Ltd.
Currently, plan members are automatically enrolled into a retirement plan chosen by their employer, but reforms introduced by Jeremy Hunt, the Chancellor of the Exchequer, would give workers the right to nominate the pension plan that their employer contributes to, providing increased pension portability and reducing the overall number of savings accounts.
“When you look at the U.K. pension landscape, it’s obvious auto-enrolment legislation was brought in to get people saving for retirement because most people weren’t saving enough,” says Bexson. “[One result is that] many people still aren’t engaged with their pensions, but they’re saving by default — often at an insufficient level.”
He notes the pot-for-life approach could present challenges with payroll regarding additional payments being made to other arrangements, along with the accompanying data requirements of transactions and investments. One way to address this would be the establishment of a clearing house to handle pension administration, but this would be a significant and costly commitment.
In addition, many employers spend money on governance and engagement to help members understand their pension plan. If individuals used their own arrangements, says Bexson, they’d no longer benefit from this approach and it could result in members sticking with poor quality pension policies through familiarity.
While consolidating accounts for efficiency is a good idea, it may not work for Canada’s retirement system, as it has different issues than the U.K., says F. Hubert Tremblay, principal at Mercer Canada.
“When we look at the efficiency of the Canadian retirement system compared to other countries, a major challenge is the small amount of private sector workers covered by employer-sponsored pension plans. To improve our system at the macro level, we should be focused more on dealing with coverage in the private sector than something like getting all the small pots of money together.”
Another one of Canada’s retirement challenges is efficiency of savings, he adds, because people who are contributing to their own registered retirement savings plan with financial institutions or in the retail market have large investment fees. He cites decreased investment management fees and increased levels of savings for middle-income earners as potential solutions.
“I think the next step for our system is to make it work at retirement for people who have been covered by defined contribution pension plans or those who accumulate their own savings in their RRSP. [We need to figure out] how they can convert their accumulated account balances into real retirement income.”