Open season for pension transfers – Altus’ Ben Cocks

DWP is embedding in legislation an open-standards approach to pension transfers that will create genuine competition, says Altus Business Systems director Ben Cocks

Anyone reading the DWP’s paper describing how the automatic transfer policy, more commonly known as pot follows member, will be implemented may not have spotted a crucial detail set out in Annex 1. That is where the DWP outlines how it will use existing open standards – more technically, the ISO 20022 message set and the UKFMPG market practice – to create a federated technology solution with many technology vendors supplying interoperable systems.

Before you move swiftly on, I’d encourage you to look past the technical acronyms and consider the wider implications of this decision. This is a crucial piece in a very big jigsaw.

Much of the thinking behind financial services legislation is now driven by competition. New pension freedoms have firmly put the decision-making power back with the customer and we can expect fierce competition between providers trying to win their business. 

The message from the regulators is clear: the pension industry needs to function like any other healthy competitive market. But for competition to work effectively it must be possible for pension money to be transferred freely and consistently across all parts of the industry: life offices, occupational schemes, platforms, master trusts and bespoke Sipp providers.

In response to this challenge, a broad range of industry bodies, providers and technology suppliers have joined a collaborative initiative to create an open-standards transfer framework comprising the UK Funds Market Practice (UKFMPG) ISO20022 technical standards and the TISA Exchange (TeX) contract club. The initial work completed in 2012 was in response to the RDR and focused on Isas and funds. But the framework was extended in 2013 to cover a wide range of pension transfer scenarios and the first live pension transfers were completed in 2014. No upfront technology investment was required. Instead, half a dozen technology vendors developed competitive solutions, each motivated to make sure they offer the best solution to their target market at the most competitive price.

This has created a single framework for transferring all types of investment product between all types of provider. One universal solution for a consistent service to customers and the free flow of assets across all parts of the industry. And it isn’t owned by any one organisation. Too often in the past, initiatives to improve efficiency have resulted in a proprietary system owned by one part of the industry with too narrow a focus. In contrast, the open-standards approach encourages innovation, supports competition between technology vendors and allows solutions to evolve and expand over time.

Different segments of the industry need very different solutions: a highly automated process for huge volumes of simple cash transfers for the large master trusts; a low-cost but highly flexible process for the small bespoke Sipp providers. 

The competition between technology vendors ensures that providers get the solution they want at the lowest price, and open standards will ensure that all those systems interoperate.

The results so far are impressive. In the two years since the first Isa transfer, volumes have increased to 100,000 transfer messages a month and transfer times have come down from eight to 12 weeks to under six days. Volumes are still rising and transfer times decreasing even further. With more organisations implementing true straight-through processing, some quite complex in-specie transfers involving many parties are completing in just a few minutes and costing less than £1.

But there is still work to be done and parts of the industry are yet to sign up. And this is why the DWP announcement is important. In the past, the FCA has monitored the initiative and in broad terms given its blessing, but this time the DWP is embedding the open-standards approach in legislation from the outset. The DWP has had a commendably open debate with the industry, considered the broader landscape beyond the immediate requirements of automatic transfers and concluded that this is the approach that will best serve the industry, and more importantly the consumer, in the longer term.

This is a huge vote of confidence for the open-standards transfer initiative and will ensure industry-wide adoption. It isn’t about just automatic transfers or even just pensions. With a common standard for transfers allowing assets to flow freely between all parts of the industry, providers can focus on making sure they offer the best service and the most compelling products to customers.