Big is beautiful
Solving the small pots conundrum is an absolute priority. John Greenwood considers the options
Nobody in the pensions industry disagrees with the DWPs’ goal of rationalising the problem of small pension pots. It is an issue for the industry already, and with auto-enrolment and high job churn set to create around 4.7m extra small pots by 2050, a solution is urgently needed.
But deciding which solution is best suited to addressing the challenge is less straightforward. Providers want to shape the new structure in a way that best supports their business model, but other stakeholders, representing employees, employers and pensioners, will also want to ensure their interests are not overridden in a dash to efficiency.
The logic behind the DWP’s consultation - Meeting future workplace pension challenges: improving transfers and dealing with small pension pots - is clear. It will cost 10 times as much to communicate with someone with 10 short pots than it will with one big one. And someone with one large pot is likely to be considerably more engaged with it than they are with 10 small ones.
Pension minister Steve Webb says: “We do not want the achievement of auto-enrolment undermined by a future where people collect lots of small pension pots, which they may lose or never consolidate to achieve a decent annuity.”
The paper suggests a number of ways to help people more easily transfer and keep track of their pension savings. Proposals include automatically transferring small pension pots to one or more aggregator scheme, so that all small pension pots are stored in one place, or automatically transferring pension savings so they follow an individual from job to job. Aviva is one provider that supports the idea of employees taking their auto-enrolled pension savings with them when they move jobs. Regardless of when this legislation is introduced, Aviva wants to see it retrospectively applied from the launch of auto-enrolment in October 2012. Aviva’s preferred automatic transfer model would see a central clearing house match an employee’s old auto-enrolment scheme with their new employer’s scheme.
We do not want the achievement of autoenrolment undermined by a future where people collect lots of small pension pots, which they may lose or never consolidate to achieve a decent annuity
Aviva director of workplace savings Paul Goodwin says: “We have a huge opportunity with auto-enrolment to transform how people in the UK save for their retirement and it’s important that younger workers get into the savings habit as soon as they start their careers. One way we can encourage that is to ensure that those in auto-enrolled schemes can see everything they have saved in one place.”
One of the concerns with nudging employees into different schemes is the way it rides roughshod over contract law, potentially putting them in schemes with higher charges, different levels of choice and different risk profiles, without them actually agreeing to it. People being transferred would be given the option to stay put, but the system would still need to take out as much litigation risk as possible.
With that in mind, Aviva has suggested that automatic transfers should be limited to automatically enrolment schemes, as they will meet minimum suitability standards and ensure adequate protection and broadly equal suitability for the consumer.
B&CE says the establishing of a central pensions registry is a priority that will save providers a large amount of cost, which can ultimately be reflected in lower charges, make it easier for consumers to trace their pensions and ultimately give them a single snapshot of their entire pension savings.
A central register would not only help deal with the issue of small pots but it would also facilitate the introduction of combined pension statements says B&CE. For this to work, providers would have to send data to the central pensions register, which would then be complied and amalgamated into one statement. Requests for a pension fund consolidation illustration would trigger a fully or part automated response direct from the provider, and in the near future this could be developed to include state pension entitlement in a single statement.
Jamie Fiveash, director of customer solutions at B&CE says: “We have been lobbying for years for a solution to the automatic transfer of small pots and believe a ’pot for life’ is the right of every consumer. The formation of a central pensions register will provide accurate access to all pension entitlement forecasts including state entitlements in one place and will go a long way to resolving this ongoing and growing issue.”
Solving the small pots conundrum should, says the DWP, go some way towards lifting the extra burden placed on schemes caused by the planned abolition of short service refunds, which is predicted to retain £70m to £130m a year in pension savings and which could take effect from 2014, provided a solution on small pots has been reached by then.
Punter Southall principal Alan Morahan says: “It is important that both of these issues are dealt with in tandem because the impact of abolishing short service refunds for defined contribution schemes would be to create more small pension pots. Couple this with the introduction of auto-enrolment and we could have seen the industry creaking under the administration of millions of pots, each of which wasn’t worth very much.”