The government has been urged to allow recent policy developments and initiatives in the defined contribution (DC) space to bed down before moving forward into “uncharted territory”, with "grave concerns" raised around its lifetime provider model proposals.

The Chancellor, Jeremy Hunt, previously launched a call for evidence on plans to offer employees a choice on their workplace pension provider as part of his Autumn Statement, which also looked at whether a lifetime provider model would improve member outcomes.

However, in its response, the Society of Pensions Professionals (SPP) said it had “strong reservations” about the suitability of the proposed lifetime provider model for UK's DC pensions, outlining several key risks and challenges.

While the SPP welcomed the Department for Work and Pensions’ (DWP) efforts towards developing a sustainable long-term strategy for the UK’s pension provision, it raised “significant” and "grave" concerns about the model.

In particular, the group warned that, despite its appealing simplicity, there is a real likelihood of employer disengagement, quality dropping and adverse selection by providers to the detriment of lower-income savers.

The significant system changes and increased payroll complexity that would also be needed were also identified as extra downsides in the group’s response.

In addition to this, the SPP noted that the proposed lifetime provider model places crucial decisions about pension savings on the shoulders of savers, warning that a significant proportion of savers will never have the tools and knowledge needed to make informed choices.

Indeed, research from the Pensions and Lifetime Savings Association (PLSA), also published today (18 January), found that the majority (69 per cent) of employees would prefer their employer to pick their workplace pension, with many lacking the required confidence and skills to choose for themselves.

In light of these concerns, the SPP argued that the DWP should acknowledge that a key reason for providing dedicated support during the decumulation phase is because of the widescale recognition that many cannot or do not want to take these really important financial decisions, with a significant proportion ultimately making sub-optimal choices.

It also urged the DWP to take a more extensive and critical review of the international experience of the lifetime provider model, arguing that this exhibits "clear flaws", such as stifling innovation and competition, as well as promoting rigid contributions and minimum service standards.

Instead of the proposed lifetime provider model, the SPP suggested that government focus should be on the many strategic initiatives currently under development, including those aimed at addressing the issues of small pots, further consolidation proposals, pensions dashboards, increased pension investment in “productive finance”, and the introduction of collective DC (CDC).

SPP DC Committee chair, Giannis Waymouth, commented: “Although a lifetime provider model sounds like it could address with simplicity some of the ills affecting current DC pension, in reality, it has the potential to create more problems than it solves and to drive down the quality of pension provision.

"Severing the employer link and putting all the decision-making burden on savers could lead to sub-optimal decisions, as well as reducing market innovation and competition.

"DWP should give time to recent policy developments and initiatives in the DC space to bed down before moving forward into uncharted territory, in particular when potential harms are higher than the expected benefits."

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