Whatever solution to the small pots conundrum the government opts for, there will be winners and losers. John Lappin finds a hotly contested consultation
The two big ticket options on the table are a ’pot should follow member’ system and the super aggregator or aggregators proposal. Improvements to the existing transfer system are a less spectacular third option.
For stakeholders in the UK pension, the degree of opposition or support for the various Government proposals tends to depend on three things. First is the practicality of each proposal. Secondly, support also depends on whether the various experts believe a new system would genuinely take the smallest pots, or whether, ultimately, most pots might be aggregated or even whether all pots would ’follow’ the member. But support also depends on whether they stand to gain or lose from the outcome.
Everyone acknowledges the problem – that auto-enrolment could see many transitory workers opted in and left with many small pots. But not all see this as a problem big enough to justify the market interventions being planned, and some argue that some of the proposed solutions could actually bring worse outcomes in the long term.
The National Association of Pension Funds wants the Government to create a series of super-trusts that would reduce the likelihood that small pots would be created.
However, it would also like to see the reform delayed from its current target date of 2014 and the proposal for banning short service refunds also delayed to avoid exacerbating the small pots issue before the system of transfers is made easier.
The TUC in its response comes out against the ’pot follows member’ proposal and backs the use of super aggregators with specified requirements on issues such as charging, which they suggest would probably make the aggregators better value than many schemes.
However, the TUC wants to see these aggregators accepting almost all pots, not just small ones, a call that must worry some traditional pension providers that may fear losing valuable assets under management.
The TUC’s response says: “While the consultation document only asks about small pots, we do not see any consumer advantage in not applying this test to all transfers however large or small. The starting point for these questions appears to be what is best for pension schemes, not what is best for pension savers.”
If there is to be a cap, the TUC would like it to be a substantial one and with voluntary transfers allowed above it. However, other pension experts say a cut off is essential. Independent pension expert Rachel Vahey says: “Losing higher value pots would also be expensive for schemes, and would increase the costs for the remaining members, potentially increasing their charges as well.”
Most commentators would assume that Nest, with its semi-public status, would be a natural aggregator and the organisation in its response to the consultation says it can see why this might be the case. But it is concerned about the potential cost of an obligation to take lots of small pots.
While the consultation document only asks about small pots, we do not see any consumer advantage in not applying this test to all transfers however large or small. The starting point for these questions appears to be what is best for pension schemes, not what is best for pension savers
“For any provider of such an aggregator model, where they are under an obligation to accept any transfer, this creates significant potential cost, which it would be unlikely could be recovered within an acceptable charging framework from the members in question. If Nest were to take on such a role, we believe it would be essential to ensure that the existing members of Nest, brought in through its primary function as a scheme provider into which employers can enrol their workers, should not be asked to bear these additional costs.”
Elsewhere, Nest proposes what it describes as two rights and a responsibility as part of general support for a more gradualist approach that it believes will allow progress towards the Government goal of one big pot.
These are the right for all individuals to choose to pull their pot with them when they move. This includes choosing an alternative destination scheme if their current scheme instigates a ’push’, the right for any qualifying scheme to choose to push a pot away when a member leaves the employment that was associated with that scheme and the responsibility on at least one provider that meets certain quality conditions, to accept any transfer instigated by a scheme or an individual.
However Nest is against one suggestion, that of a clearing house, put forward by one of its private sector rivals, Now Pensions, arguing it would add more complexity.
Now Pensions chief executive, Morten Nilsson, believes his proposal may have been misunderstood. “We are saying let’s try and find a solution that is as simple as possible and pragmatic. Let us not try to create a big IT project, that will take too long to construct, will cost a lot of money and will never work.”
He says even the phrase ’clearing house’ may be the wrong term. It would be a website, which might operate as a pension pot hotel, funded by underlying aggregators, of which Now Pensions would like to be one.
They would take and aggregate small pots up to £2,000, possibly divided between aggregators by national insurance number. A transfer would be triggered by a provider, which would write to a member who had stopped contributions, saying they were deemed to be deferred, and if the member did not ask to do something else, they would pay for the move to the hotel.
The aggregators would be subject to strict KPIs, enforced by the regulator, and there would have to be safe harbour provisions to cover transferring trustees and providers.
“At any time, you can transfer out again of the pension pot hotel. That is the hotel part. Clearing is basically a few functions. It is about being the contact point, then distributing to the aggregators though, there cannot be too many aggregators because you need scale. We would like to be an aggregator. It suits our model, but we believe in competition and think there should be others,” says Nilsson.
Although it sounds simple, pension providers have definite concerns about super-aggregators in various guises. One industry view is that it would be unfortunate were the UK’s two largest schemes to be an aggregator and the Pension Protection Fund.
Many established players are unenthusiastic, particularly if there were only one such aggregator in the market. Aegon head of regulatory strategy Steven Cameron argues that the ultimate goal should not be amalgamation for its own sake but improving member outcomes.
He says: “There will be some workers who don’t intend to save, but who fail to complete the opt-out process in the prescribed time, and build up ’accidental pots’ before leaving their employer’s pension scheme. They may have built up tiny pension pots, perhaps less than £10, which cannot be refunded under the current rules. We are in favour of allowing cash rebates for pots below some very low level of say £100.”
Let’s try and find a solution that is as simple as possible and pragmatic. Let us not try to create a big IT project, that will take too long to construct, will cost a lot of money and will never work
The firm does not support a physical aggregator at all. It argues that a single aggregator “will become a captive competitor, eventually dominating the market, destroying a vibrant marketplace and potentially leading to poorer member outcomes. We believe the way forward is to create a data hub allowing for virtual aggregation, rather than physical aggregation.”
Providers and trusts would have to provide information to this scheme. Cameron also mentions the importance of advice in any solution.
Vahey says the key to any transfer system is whether there is a cut-off limit to the amount automatically transferred. She says that by setting this at £5,000, if schemes are able to transfer these small pots out, then this will significantly reduce their costs, especially once short-service refunds become a thing of the past.
However, she adds: “It will also mean new costs for schemes. They will have to build in automatic triggers and communications. And these new costs will come on top of the vast amount of changes they have already made or are making for automatic enrolment. They might also need to provide help or point to advice routes for members to help them make a decision, if the member is given the opportunity to not transfer.”
Vahey raises an issue often mentioned by advisers – that with the automatic transfer idea, if the person transfers to a scheme with higher charges or loses GARs then they will lose out. She says this could be a ’mis-transferring’ scandal waiting to happen. She says: “We need to proceed with utmost caution on this. Arguably the implications of that are not too high if there is a cut-off limit of £5,000. The difference in charges or annuity income could be in pence rather than pounds or hundreds of pounds. However, if there is no cut-off limit then the implications of potential ’mis-transferring’ are increased, and dangerously so. I don’t think we should go ahead on that basis, but if we did then the scheme would need to build in more triggers to alert the member to the possible consequences.”
Paradigm Pensions founder Steve Bee says investors will not want to lose control over their pension money. He says: “If it goes with their knowledge to where they want it to go to, that’s fine. If it goes somewhere without their knowledge or control of it, then I don’t like that at all. People want to have control over their own money. They won’t invest in something they don’t understand and they won’t invest in something they think controls them rather than them controlling it. If it goes to a personal pension, great, but not if it goes into a big amorphous mass of money.”
Bee’s comments are echoed to some degree by Hargreaves Lansdown’s head of pension research, Tom McPhail. He wants the system tweaked and is wary of too much reliance on defaults and opts out, or certainly any more than are in place already. He says: “Our underlying philosophy with member engagement is you need to get them a little bit interested. With small pots, you could build a big grandiose ’pot should follow member’ or revolving carousel scheme, but you can’t default people all the way through. You have to use default up to a point, but when you come to small pots you need to write to people when they move jobs, and say ’here is a simple statement, here’s how much you got, if you want to move it sign this form’ and move back to encouraging personal responsibility.”
A single aggregator will become a captive competitor, eventually dominating the market, destroying a vibrant marketplace and potentially leading to poorer member outcomes
He would also like to see fines imposed on firms that don’t move money quickly enough because that harms engagement. However for pots under £2,000 where the provider has waited a year, the provider should be able to transfer the money to Nest.
Gemma Goodman, head of the Annuity Bureau, says her organisation offers services that already brings smaller pots together often to help clients obtain a better rate. But in general terms she believes more aggregation is a good thing. She says: “As we move to from DB to DC schemes, some concerns about consolidation disappear, the guarantees disappears. I would back that because millions remain unclaimed and people forget where they have a pension. It would make administration much easier.”
Thomsons Online Benefits chief executive Michael Whitfield says: “I think a provider or employer should say after a certain period of time, a member is deemed not in the scheme. It needs to be moved into a warehouse arrangement.” He would prefer it to be placed in a government-approved scheme rather than a government-run one, and definitely not government-funded. The scheme would hold the money in a safe fund, but the onus would be with the person to do something or, perhaps after several years without contact, the warehouse provider keeps the money.
Whitfield adds that it will be easy to build such functionality in to any employer auto-enrolment arrangement.
Scottish Life business development manager Jamie Clark has been very vocal in coming out against Nest as an aggregator and indeed any other aggregator firms, on the basis of market distortion.
But, while the pension firm might prefer a ’pot should follow member’ system, he is also worried that what started as a small pots consultation now feels like it is about all pots.
“Slowly, it became evident they were talking about all pots, which we are not in favour of in terms of suitability and advice. We think that for genuine small pots that is a possibility, but not anything over £2,000. With regards to the method of the transfer, we support a virtual portal, perhaps like the pension tracing service, which could let you log on, you could see all your pension plans. It would be up to the individual to decide what to do. Up to £2,000 could be transferred automatically. Anything more should be directed to financial advice. The aggregator scheme could be an individual personal pension plan, and have one retirement pot for drawdown. That gets over any religious reasons, ethical funds, any performance issues.”
Discussing advice on small pots, Master Adviser senior partner Roy McLoughlin says: “It is so time consuming, because insurers will not take transfers without advice. If there could be an execution-only service, that might help. Normal customers cannot understand why it is not easier to transfer pensions as well.”
However, in the context of the overall reform, some are asking ’why bother now?’ Pitman Trustees managing director Richard Butcher says: “The issue Steve Webb has raised is valid but the regulatory solutions will be extremely expensive. It would be far more sensible to sit back and see if there is regulatory arbitrage. We are slated to have a review of Nest in 2017. It would be better to say we are watching this until 2017.”