The FSA lists four things to look at when considering a transfer in charging. They are guarenteed annuity rates, guarenteed investment returns, charges, both cost of transfer plus ongoing charges, and the fourth one is attitude to risk of the client and ensuring a selection of suitable investment funds based on that attitude to risk.
Why would an automatic consolidation of pension pots not have to take into account all four of those factors when an advised consolidation of pension pots would have to.
Without a doubt, there has to be the same standards applied to automation as would apply to any voluntary transfer.
This raises issues of cost and also the question of who is going to take responsibility for this, as it will not be a Government department.
What if, as a saver, I am giving up some kind of guaranteed annuity rate or a guarantee on some sort of investment and without my active involvement in the transfer, perhaps even my passive involvement in it in the sense that Without a doubt, there has to be the same stan-dards applied to automation as would apply to any volun-tary transfer I might be blissfully unaware that this is the case, and suddenly I lose those guarantees as a result of this transfer?
Without a doubt, there has to be the same standards applied to automation as would apply to any voluntary transfer
Who is going to take responsibility for that? Particularly in light of the pressures on the IFA community, to make sure if they are ever doing any consolidation work, these are two of the key things that the regulator wants us to take a very close view of. And quite rightly too. I would be fearful of some small pots get swept up in this and the consumer is disadvantaged by it.
In the context of Nest, I guess you would not be too concerned about the financial security of the provider but one of the reasons why people hold on to various pension pots is distribution of risk.
Another issues is what level can be considered a small pot? I don’t consider £100,000 as small. The average pension pot in the UK is still around £50,000.
I would not have thought that anything upwards of £25,000 could be considered to be small. The industry would have to come up with something that is realistic.
For smaller pots, I think allowing automated transfers is completely appropriate. Part of the problem we have got at the moment is lots of people have worked for companies for maybe two or three years, have built up a pension with one employer and then they move on to another one and another one. The reality is people could build up seven or eight different policies.
This causes difficulties because when people go to work out how much money they have saved in their pension, very few of them will add all those pots up and get a total of what their savings are. It makes it very difficult for them to really understand what they are going to get as an income.
Auto-enrolment is obviously Some people might have chosen certain funds they want to go into and they need to have the right to say: ’I am quite happy with what I have got’going to make that whole situation even more extreme because people will build up lots of different holdings with different employers. If an employee works for a company that uses Nest and then goes and works for another employer that is with Nest, they will only have one account, and that is going to generate some expectation in the market place that people will accumulate their holdings within one account.
Some people might have chosen certain funds they want to go in to and they need to have the right to say: ’I am happy with what I have got’
However, we need to clarify the size of the transfers. I am not going to say we should allow people to transfer pots of £500,000 because pensions are complicated and people have all sorts of rights and benefits and different types of guarantees and so on.
People will also need to have the right to opt-out if they want to do so. Some people might have chosen certain funds they want to go into and they need to have the right to say: “Actually, I am quite happy with what I have got.”
We also need to have some criteria around charges. You do not want someone paying a 0.3 per cent AMC on their original plan and then being transferred into a policy with a much higher charge. If, for example, a cap on the plan people are transferring to of one per cent was imposed then people are not going to sleepwalk into a higher charge.
However, the danger is that we can get too hung up on that – charges with transfers of £500 or £1,000 will not have that large an impact on overall fund levels, so for smaller pots this would be ideal.