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Michael Johnson: Aggregation could boost pension incomes 13%

Centre for Policy Studies research fellow Michael Johnson says his radical plan to consolidate people’s pensions could increase retirement incomes by 13 per cent.

Earlier this month, the CPS published a paper, titled ‘Aggregation Is The Key’, calling on the Department for Work and Pensions to abandon the proposed pot follows member reforms, whereby a person’s pension moves with them automatically when they change jobs.

Johnson says the Government should instead create a central clearing house, called PensionClear, to act as an “efficient, nationwide service” for consolidating pension pots.

He says the clearing house should be connected to a network of competing pension aggregation vehicles, both physical and virtual, which would accept automatic transfers of all forms of retirement savings – including Sipps and Isas.

While the Government has proposed a limit of £10,000 on auto-transfers through pot follows member, Johnson argues there should be no limit.

Johnson has now published a briefing note setting out the impact his plans would have on pension charges.

He says the reforms would reduce annual charges by between 0.35 per cent and 0.75 per cent. Assuming annual investment growth of 3 per cent, this would convert to an increase in retirement income of between 6.1 per cent and 13.3 per cent.

If the reforms cut pension charges by 0.55 per cent, Johnson says retirement incomes would rise by 9.6 per cent as a result.

He says: “A 9 per cent increase in pensions really matters when, in 2010-11, 45 per cent of single pensioners had total pension income of less than £10,000, while 27 per cent of pensioner couples had less than £15,000. 

“In practice, the increase in pensions care of aggregation would be more than 9 per cent because savers with a single, larger pot of assets would be able to negotiate a single annuity larger than the sum of several much smaller ones. 

“Furthermore, a network of competing virtual and physical aggregators would deliver significant additional bargaining power to savers, encouraging the industry to become both more competitive and efficient. 

“That should help it rebuild trust with its customers, leading to more business.”

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