Automatic for the people
Aviva’s Edmund Downes considers the implications of allowing automatic transfers in the pensions market
Today a change of employer generally leads to members accruing benefits under a different scheme. This means that many people retire with a number of small pots and a lack of understanding of their accumulated assets. Auto-enrolment will make this worse.
Only a small minority of auto-enrolling members will be inclined to volunteer to consolidate their pension pots. They will probably be even less engaged than current members. Equally to expect an advisory process to assist consolidation is unrealistic. Most members will be resistant to paying fees and their small pots will make adviser charging difficult to justify.
So allowing automatic transfers under DC auto-enrolment schemes could be an ideal solution. It would help providers reduce the costs of auto-enrolment and benefit consumers by making it easier for them to track their savings.
The basic idea is that by using a central clearing house a member’s old scheme is able to locate the scheme which is currently accepting contributions by a simple data match. Subject to verification, the ceding scheme directs funds to the new scheme without consent. Once started the transfer process completes even if contributions to the new scheme stop.
There are of course a number of issues which would arise as a result of automatic transfers. However, as the concept appears to be gaining traction with policy makers, I offer the following as initial thoughts on how the system might need to work in practice:
Accept that auto-enrolling members are different
Today, members of pension schemes are assumed to have actively sought the product. Under auto-enrolment, the member can be placed in any scheme with any fund at any charge level. If we accept this “passivity”, we can then accept that there is therefore no detriment or advantage in automatically transferring the member from one qualifying scheme to another. This acceptance opens the doors to automatic transfers.
Allow members to opt out of the transfer before it occurs
Even if most members passively move between schemes, they must be given the right to transfer elsewhere or perhaps stay put, though perhaps not if the scheme is trust based and service is under two years.
Only force transfers in respect of default investors
Automatic transfers should only be for members who are in the default investment offering. If a member has selected alternative funds they should be given the right to opt into automatic transfers, but otherwise left alone.
Only allow automatic transfers to be made into auto-enrolment schemes
Auto-enrolment schemes are expected to meet certain minimum suitability standards. Other schemes and plans, even existing Stakeholder schemes, do not necessarily meet this standard, so the risk to the member of such a transfer without consent could be considered too high.
Promote higher standards in a transfer “club”
As a progression from the above, it makes sense for the automatic transfer regime to be at least in part self regulating - with “club” standards. High “club” standards on governance would minimise potential detriment to members. “Club” standards would also allow variation between schemes and continuous improvement without the restrictions of additional regulation. In addition someone has to pay for the clearing house.
No transfer fees or costs
This is an absolute must (but might prevent some schemes with consultancy charges from participating). Contracts with adviser charging would not be suitable for automatic transfers anyway. Received transfers should probably not generate consultancy charges
.…. and allow NEST into the frame?
This is going to be a very divisive issue. Depending on the number of participating schemes there could be considerable breaks between membership of a scheme in the “club”. Including NEST might reduce the length of these breaks and NEST could also act as a repository for funds if the person leaves the job market completely.
There is much to be debated on this subject and a number of legal hurdles to be overcome. But hopefully if we approach the debate thinking how we can do this, rather than of reasons why we can’t, then it could succeed - for the benefit of our customers.
Pensions Manager, Aviva