For providers that have spent years building up a pension back book, the proposal from the Department for Work and Pensions that maybe all pots, regardless of size, could follow members from job to job must be a challenging one. But while such a massive intervention in the market may seem unlikely, the pensions industry should not underestimate the way auto-enrolment has moved the goalposts on what is acceptable.
From a consumer’s point of view, the proposal probably makes the most sense. Ask the man in the street whether he wants two or even three fairly fat pots when he can have one big one and know just how much or little he can expect to retire on and it is unlikely he will opt for multiple pots. For that reason, the DWP is right to at least give the idea airtime.
Whether that works for the industry that supplied him the pension in the first place, or the former employer that paid a big chunk of the contributions, is another matter.
That the consultation asks if there should be a maximum pot size for automatic transfers implies that it is at least considering that there should not. It is not surprising, therefore, that providers are jumpy at the suggestion, proposing virtual aggregators rather than something that could quickly sweep their business away.
Providers and others in the pensions industry are doubtless sensitive to the changing context under which this consultation is taking place.
I sense a growing body of thought in some corners of the political landscape that the pension industry is a lazy industry that is being propped up by Government. An industry that has for years benefited from billions of pounds of tax relief from the Treasury is now set to benefit further from the soft compulsion of millions of workers to save into its plans. It can therefore expect the Government to be considerably more demanding in what it expects from it, goes the theory.
Evidence of this can be seen in both the repeated attacks on tax relief and the hardening attitude towards defined contribution pension charges, however inaccurate it may seem to those active in the industry.
Pensions minister Steve Webb has for some time been clear about his desire that workers retire with one big fat pot. The reality is that for many people auto-enrolled at band earnings, the best the small pots consultation can hope to achieve is them retiring with one small pot rather than lots of minuscule ones. Obviously, small pots need to be dealt with but the problem is, whichever way we go, more complexity, cost and unforeseen consequences might be created. This consultation feels as complex as auto-enrolment itself.
For consumers, the key challenge is to ensure individuals transferred are not put into something considerably worse than their existing scheme.
These problems evaporate when the benefit of the majority argument is deployed. If the pot is a small one, the detriment of a higher charge is not so significant, nor is the operation of a considerably different investment strategy. And given the fact that all the individuals affected by these new rules will be those in schemes qualifying under auto-enrolment guidelines, differences in design are not likely to be that great.
Furthermore, given that the same consumer is just as likely to move from a worse to a better scheme next time around, and that all the schemes he or she will ever join will be cheaper as a result of the efficiencies created, it is hard to see who would object to overriding contract law in this way.
As to the DWP’s more ambitious proposals, we are still a long way from answers. I doubt anyone today has a clear vision of what the future holds for small, or all pots. This one looks set to run and run.
John Greenwood is editor of Corporate AdviserMoney Marketing