Black looks on small pots

Steve Webb’s pot-follows-member solution is gaining enemies by the day.
John Lappin detects a sense of rebellion in the air

Small pots dilemma

Pension minister Steve Webb’s decision to favour pot follows member as a solution to the small pots issue has caused big ructions in the UK pensions industry. Some even say it comes close to turning a good pension minister into a bad one, and that the reform is almost as complicated as auto-enrolment itself and should be parked for now. The most sceptical suggest that the DWP has forced its own hand by insisting on banning short service refunds. Others agree with the move in principle but worry about the details and the fact that costs are currently set to fall on the industry.
One of the strongest ‘anti’s’ is PTL managing director Richard Butcher. He says: “I think it is absolute madness. The minister wanted to close the short service refund loophole on the back of concern about abuse by master trusts, stirred up by insurers worried about their market share, but there was no evidence there was going to be abuse. They should have reviewed it in the 2017. Having abolished short service refunds, they had do something. Out of aggregation or pot follows member, he’s chosen the wrong one again.”
“Pot follows member is an impractical solution to a problem that never existed in the first place. It is going to cost vast sums of money the industry will have to pay for, maybe by charging more, and we’ll get worse outcomes.
“My worst fear is it will be a bureaucratic nightmare. Sadly I think the best possible outcome of this is that Steve Webb leaves office. He is a good pension minister, but he is doing the wrong things now. It is big blot on his record,” he says.
Some say it runs contrary to everything advisers have been told to work towards.
Beaufort Consulting principal consultant Phil Harwood says: “EB consultants and IFAs have had it drilled into them that we have to make decisions that are best for the individual. What if you are coming from a 0.2 per cent AMC, to a 1 per cent scheme? It is highly unlikely to be beneficial. Members are protected around transfer advice, particularly when they are moving from an occupational scheme to a group personal pension. We have to go through a report process that looks into everything. Now they say lets scrap that report and do an automatic transfer. What if there is a guaranteed annuity? That is a massive benefit. It is a poor decision.”
There is also widespread apprehension about the scale of the task.
The Pensions Management Institute’s technical consultant Tim Middleton says: “There will have to be a central exchange system – an effective automatic process so the transfer value becomes available. The money should follow them to the new scheme. It is going to be a very major IT project to put together and central government’s record with IT has not been good.”
Aries Pension and Insurance Systems director Ian Neale says: “It looks almost as complicated as auto-enrolment. It is superficially appealing but when you factor in the political imperative to minimise the risk you have two sources of complication. The Government will be under pressure to give an assurance that the member will not be transferred into a scheme where the charges are higher, where the governance requirements are more poorly adhered to, or any other downside. Secondly the Government has acknowledged a need to provide an opt-out. The Government would be wise not to stagger on down this road, hurling obstacles, but to take a very careful planned look at this.”
Buck Consultants head of pensions policy Kevin LeGrand is more supportive in principle but also concerned about the detail. He says: “The principle of amalgamating multiple small accounts of a member into fewer larger ones is a good one, but designing and introducing a workable system to accomplish this presents a number of challenges.
“Addressing all these points will take time and resources, and the Government is expecting the pensions industry to do the work. Imposing these additional requirements upon the industry when there are so many other initiatives at the moment, including the flagship automatic enrolment to bed down and the new state pension and its widespread implications to deal with, is asking a lot of the industry”.
However LeGrand feels it may be the Australian experience that is driving things and others with direct experience agree.
LeGrand says: “Steve Webb is naturally keen to sort out as many things as possible from his reform agenda before the next general election, and so is pushing forward on a number of fronts. He sees the small pots issue as an important contributor to the success of automatic enrolment, and in the medium to longer term he is probably correct. Experience to date in the UK, and in Australia under their compulsory “Super” arrangements, shows that without any outside driver, pots generally stay put and many owners lose contact with them.”
Peter Nicholas, chief executive and managing director pension communications firm AHC, which advises on schemes in the UK, the US and Australia suggests that Australia has effectively had a laboratory running for 21 years. He warns that what are known as ‘lost supers’ now account for A$18bn.
He says: “That is really lots of small pots. In Australia, people change jobs roughly every seven years. The issue for the UK is looming not today or tomorrow, but in seven years you will have all these pension pots going to be left around.”
He says it has become a real hassle for employers dealing with deferred members, members may find their old company has merged or gone under, although businesses have sprung up to reunite people with their old supers.
“If you have lots of little pots, you end up paying three or four or five times the amount of fee,” he says. He adds that Australia should have had a common identifier and is now trying to retrofit a tax file number on to these pensions. He says the National Insurance number must be used that way in the UK.
“I am in the advocate camp for pot follows member. We’ve all got a savings problem. If you want DC to work and you want each individual to save enough, then why put those pots at risk of being dissipated by fees. By pot following member you get away from the fragmentation of the amount and multiple fees. There are risks if you transfer into cash, timing risks, but the risk of having fragmentation of pots is a far higher risk because of the impact of fees over time.”
LeGrand says: “Members will need to be able to assess easily their total pension accruals, although I would argue that the emphasis should be more on what the accrued funds will provide than on the capital value of the pots themselves and the chances of them losing track of particular pots will, in theory, be less if they are consolidated. However, note that the automatic transfer provisions will only apply to pots of less than £10,000, so it will not take much to get to a size that means that a pot will not automatically transfer, and inertia will work in favour of no transfer taking place.
“There will be a cost to establishing and running the system, including the establishment of the database which will be required to enable schemes to identify past small pots associated with their members. It is anticipated that the industry and not government will carry this cost, which will filter through to additional charges to members – at a time when charges are being squeezed and charge caps are being widely touted by groups including the Labour Party.
“There is also a challenge in terms of members moving jobs frequently, being automatically enrolled each time on low pay, and their transfers running some way behind them, with the scope for confusion over what needs to be transferred to where; the member may also return to work with previous employers, creating “loops” of transfers which will add to confusion.
Neale adds: “Realistically, I would say that it would be unlikely even if they are very clear about the decisions to take, to be up and running for the completion of the AE transition. We are talking primarily about leavers who have been auto-enrolled. I am not sure the urgency is quite so extreme as some people in government are trying to make it.”
Neale, LeGrand and Middleton are among those warning about a big problem with pensions liberation.
LeGrand says: “If there are not sufficient safeguards introduced, particularly around which schemes are allowed to access the member pots data, the spectre of automatic transfers making pensions liberation easier by removing all human element from the transfer process looms large.”
Middleton says: “We would be very keen to see how the DWP is going to make sure there are sufficient safeguards to stop people’s funds from being stolen. Until such time as the DWP can demonstrate that it is fully aware of how serious the problem is and it is has clear proposals how it will prevent it going forward, there is cause for concern there.”
There is also still significant pressure to switch system. LeGrand says: “In previous statements, DWP has expressed, understandably, a strong preference for a computerised system. However, if that cannot be introduced in time, there is the potential option of having a person’s accrued pension pot details added to his P45 so it is handed to his new employer. This is a second-best option on many levels, but it may be what we end up with, at least on a temporary basis if a more effective system cannot be introduced in time.”
Aviva and Hargreaves Lansdown have joined together to call for a system that does not involve a physical transfer of money and that avoids details such as the £10,000 threshold. Members would retain their old scheme and in some circumstances their new employer would pay into it.
Under the proposal ‘one member, one pot’ approach, an employee would inform their new employer of their pension account reference number and the name of their provider/scheme. This information could be added to an employee’s P45 form containing income, tax and NI deductions from their previous employment.
Hargreaves Lansdown head of pensions research Tom McPhail says: “This idea of arbitrarily moving people’s pension saving whenever they change jobs is contrary to everything we know about behavioural economics. If you want to encourage someone to become comfortable and engaged with their retirement planning, the last thing you want to do is change their pension every time they change jobs – how can you possibly expect them to take an interest in their pension under these circumstances?”
Middleton says: “This is going to involve a lot of planning and preparation and they need to listen carefully to what the industry has to say. If the DWP don’t then it is has the potential to be a very costly and troublesome failure. To get this to work, they need to be at the top of their game.”
LeGrand concludes: “All these challenges can be addressed, but they will take time and effort to do so. If the resulting system fails to work effectively, there is a potential crisis in the making, which risks undermining the success of the automatic enrolment initiative. So DWP must work closely with the industry to cover off all the issues. If that means that preferred timetables slip, so be it.”