When it comes to pensions there’s little disagreement that size matters. The aims of ‘operation big fat pension pot’ – Pensions Minister Steve Webb’s construction to describe the drive to amalgamate people’s pensions savings so they can easily and efficiently keep track of them – have broad support.
There are already one million unclaimed pension pots savers have lost track of. The Department for Work and Pensions warns that auto-enrolment means that number could explode.
“With millions more people saving in a pension through automatic enrolment, we must ensure that people do not lose track of money saved and miss out on vital income in retirement,” says a spokesperson. “Without action, 50 million pension pots could sit dormant by 2050.”
That much can be said to have cross party consensus.
“No one disagrees there is a problem and that you need to consolidate savings in small pots,” says Labour peer Baroness Jeannie Drake. “The controversy is around what the solution is.”
For the government it’s ‘pot follows member’ (PFM): savings in an employer’s workplace DC scheme automatically transfer to the new employer’s scheme when the worker changes jobs, bringing together all pension savings into the current scheme. For Drake and others, the transferred savings would be better directed to one of a small number of highly regulated aggregator schemes.
The two options were outlined in the government’s impact assessment of the Pensions Bill. As Drake put it in the House of Lords debate in January: “The government had two choices, and I believe strongly that they made the wrong one.”
Not too late
An amendment to the Bill sponsored by Drake, which was being considered by the Lords as Pensions Age went to press, does not insist on aggregation. Instead it aims to avoid committing to pot follows member (PFM) while still introducing the power for automatic transfers.
“You don’t need to put it on the face of the Bill; all you need to do is give yourself the power to have an automatic transfer arrangement for small pots. We can then have more time to work out what the solution is,” she explains.
Whether the amendment passes or not, though, the debate is a long way from being settled.
A central objection to PFM is the complexity of the system. For it to work, essentially, it requires pan-industry cooperation to enable every scheme to interface with every other scheme, say critics.
The NAPF, which also prefers aggregation, says that is likely to delay implementation. Even if it were practical, no one will invest in developing the systems without cross-party support this side of a 2015 election. No system of automatic transfer is going to be implemented for a few years yet, according to NAPF policy lead for DC Richard Wilson. By that time, he points out, there could well be a new pensions minister.
“The statute books are littered with clauses and regulations that never get enacted, and this could be added to that list,” says Wilson. “The debate on this will go on.”
Broadly, as well as solving the complexity of PFM – by having just a few selected aggregators for schemes to interact with – there are a number of other benefits claimed for aggregation: fewer frictional costs and transaction charges, since only the incremental saving with each employer transfers on a change of employment, not the previously accumulated pot; greater flexibility, with an aggregator able to absorb legacy pension pots, and possibly other forms of savings, such as SIPPs and ISAs; provision for the self employed and those taking career breaks, who leave an employer without a new scheme for the pot to transfer to under PFM; and guaranteed scheme quality, with the possibility for government to heavily regulate the aggregators chosen.
The last is central to Labour’s objection to PFM.
“I am concerned that a worker’s pension could be automatically shunted from an excellent pension into a bad one with high charges,” explains Shadow Pensions Minister Gregg McClymont. If Drake’s amendment is not passed a Labour government would, he says, legislate for aggregators if necessary.
Many of these points were made in Michael Johnson’s report for think tank the Centre for Policy Studies, Aggregation is the key.
Opinion is on his side, says Johnson, with consumer groups Age UK and Which?, the NAPF, the Pensions Administration Standards Association (PASA), and TUC, as well as peers like Baroness Drake and Lord Turner of Ecchinswell (of Turner Commission fame) all favouring aggregation over PFM.
“Pretty much everyone on the planet bar Steve Webb and a few members of the ABI cannot see where Webb is coming from,” says Johnson. The ABI’s support he puts down to the potential to boost its members’ dominance of the workplace DC pensions market.
“It entirely plays into their hands,” he says.
Nobody from the ABI was available to comment, but the government points out the ABI’s survey shows a majority of pension savers favour PFM.
No easy answers
The government’s case against aggregation is twofold: First, that it’s not clear how aggregation would work.
“For example, we do not know who would be responsible for selecting the scheme; the individual, the previous or new employer, the previous or new scheme or some form of automatic allocation,” says a DWP spokesperson. (Aggregators supporters note that PFM is rather lacking in detail, too.)
Second, there is a concern over competition. Either aggregators don’t include ‘live pots’ in which current members save, thus partially undermining the potential for consolidation, or they do, and undermine the market, with a few large aggregator providers separate from the employers dominating the market. On the other hand, the Office of Fair Trading has noted the market is already dominated by a few big players: with the four largest providers having 68 per cent of the assets, 76 per cent of the schemes and 6 per cent of the members.
There are also other potential solutions: for example a proposal by Aviva and Hargreaves for ‘one member one pot’ – where “everyone has their own pension and carries that with them throughout their working life, in a similar way that they have one bank account into which new employers pay their salary”, as Aviva explained it in its response to Johnson’s paper (Aggregation is not the key).
There is also some middle ground around the potential for ‘virtual aggregation’, where the money from different pension pots stays where it is, but technology provides a consolidated overview for members, so members can see the various savings and total at a glance.
“There are already systems out there that could pull in that information automatically,” says Capita Employee Benefits head of marketing Robin Hames.
Even so, there are significant challenges ahead.
“I personally think that pot follows member has an awful lot of pitfalls, but I think every alternative has challenges and pitfalls,” says Hames. “It is not an easy nut to crack.”
And there are undoubtedly more immediate challenges. As the People’s Pension head of policy Darren Philp says, two issues are being conflated: what to do with small pots; and how to make pension transfers more efficient. The latter is the more pressing.
“One follows the other; you have to get the transfer system right before you can implement a solution to deal with small pots,” he says.
“Until you sort out bog standard pension transfers it is almost an academic debate.”
At JLT Employee Benefits, director Mark Pemberthy agrees that there are more pressing issues. PFM is not perfect, but there are challenges with aggregation, too.
“The aim of consolidating small pots makes sense but I would question whether the timing is a bit ambitious,” he says. Auto-enrolment staging continues, and the industry is involved in large scale efforts to improve existing pensions to meet governance requirements and potential charging caps.
“There is a risk that a new big, national infrastructure project could draw time, effort, money and resources away from what is already a significant re-engineering of the UK pensions market,” he says.
The best thing for the pensions market might just be that the debates over small pots remain unresolved for a little time to come.
Peter Davy is a freelance journalist