Small pots – a battle we don’t need to have

The Mexican standoff between government and industry over small pots is completely avoidable says Faisal Aziz, senior director and head of Cognizant Business Consulting (Insurance)

With the recent introduction of automatic enrolment, levels of saving are likely to rise but the number of small pension pots people accumulate as they move from job to job will also increase.

Recognising the scope of the problem, the government initiated a wide-ranging consultation in December 2011 in which it proposed two alternative models to address the issue of small pots. The consultation encouraged debate around the relative advantages of one model over the other and at the time of writing, no clear cross party or cross industry consensus appears to be in sight. Consequently, it seems we have a Mexican standoff with the industry unlikely to invest without a clear assurance that there will be no policy u-turn on the one side and policy makers unable to provide such an assurance on the other.

Such an outcome appears entirely unnecessary and a possible solution is within reach. All the proposed models have advantages and disadvantages. But, from a systems perspective, there are not that many differences between each of the proposed models. Indeed, it is possibly more accurate to think of pot follows member, general aggregator and virtual aggregator less as alternative models and more as options or parameters in an overall aggregation system.

When viewed this way, it follows that the debate over the form of aggregation to adopt could be left to consumer preferences and market forces – and less to policy experts. In such a scenario, there would be a mandated default model for aggregation, say for pot follows member, but each consumer could also decide how they want aggregation to work for them. If an individual wants their pots to follow them to their next employer, the architecture would enable them to do that. If they want their pots to be aggregated centrally they could do that, or if they want only virtual aggregation, that would also be accommodated.

All these scenarios would be possible as they are each reliant on essentially the same shared architecture and system. When we see the alternative models as simply parameters or options in an overall aggregation system, it becomes easier to understand that each requires essentially the same enabling capabilities.

Specifically, in the UK, any model for automated aggregation will require the development and maintenance of very significant data, control, compliance and governance capabilities. These capabilities may be higher than those that exist in modern electronic payment systems. An automated pension aggregation that is required to function without consumer engagement will not have the fall-back of a chip or pin, or a wet signature returned from a registered recognised address or trusted counterpart with whom data and money are exchanged.

Instead, the success, or failure, of the model will be determined largely by the reliability of the data on which the system acts. Incorrect data would result in “lost” data or pension pots and in a worse case could undermine public confidence in pensions. Consider the impact on consumer confidence when encrypted data stored on a CD is lost; now imagine the effect on consumer confidence of pension pots being incorrectly transferred or indeed not transferred due to inaccurate data.

Regardless of the model used to aggregate individual pension pots, the key challenge is the same: how do we reach and maintain the level of confidence and control over data to permit and enable the movement of pension data and funds automatically?

It is therefore time to define the roadmap and plan the implementation, rather like Government did with Pada and Nest. The debate over pot follows member or general aggregator or virtual aggregator can be left to the consumer and to the market.

Faisal Aziz recently headed the delivery of an industry-led engagement to enable pot follows member, the government’s preferred option to address the small pots issue.