The government’s proposals for a pot-follows-member (PFM) system – designed to ensure pension plans with less than £10,000 move with an employee when they switch jobs – are now working their way through the legislative process as part of the Pensions Bill.
The system itself has divided opinion in the industry, with some in favour and others pushing for more of an aggregation system. “The principal reason why PFM is a better approach is that workers can better engage with their pension saving, as in many cases they will achieve just one private pension fund with which to better plan their retirement income,” says Thomsons Online Benefits senior consultant James Gilbert. “It is only when they can view a consolidated forecast of their private and state pension savings that they can plan sufficiently to meet their additional income needs. This is almost impossible when an individual may have a number of funds in different places, some of which they may forget about.”
Some people, though, fear a bureaucratic nightmare for scheme providers, consultants and employers, which could also impact on employees through transaction costs and out-of-market risk. “A number of alternatives have been suggested,” points out Buck Consultants head of pensions administration Girish Menezes. “The Pensions Administration Standards Association, for example, has suggested that virtual aggregation would be a positive stepping stone to both physical aggregation and PFM, so this should be adopted first and then we can see what is needed beyond that. This would be a far more straightforward and cost-effective way of dealing with the issue.”
For now, though, it seems as if the concept of PFM is here to stay, even if the details have yet to be worked out, and technology will play an important part in any system. “A national matching system would be the best solution, with everyone providing updated details daily or weekly via a secure network, which scans an individual’s National Insurance Number for exisiting details,” suggests outsourcing technology provider Corporate Modelling chief operating officer Alex Allan. “After an initial search in the system, more detailed information and mechanics could also be made available to agreed message standards. Such a system would be for use between pension providers, rather than employers directly.”
Central to any scheme will be the need for both a small pot register and a robust transfer mechanism, says financial services ecommerce standards body Origo development and standard manager Michael Roe. “Such a small pot register doesn’t currently exist,” he says. “An automated register would be preferable to a more cost-intensive, higher risk, paper-based P45-like solution.”
The transfer mechanism does exist, he says, pointing to his firm’s Options Transfers Service, which is already used by around 90 per cent of the contract-based market. “It handles 40,000 transfers per month; 25 per cent of which are small pot transfers of less than £10,000, and has managed £40 billion of pension transfers since its launch,” he says.
Any system would need to be able to identify eligible pots for automatic transfer, ask employees if they would like to opt out, initiate a transfer into a new scheme and receive a transfer from the old one, suggests Allan. “The government’s view is that when the individual joins a new scheme, that scheme has to search for information about the member’s dormant pots, so this will require a country-wide system,” he says. “To do this, we may need new services for the providers to subscribe to, which offers this information on demand, similar to the exchange mechanisms for open market options, but with new messages and standards.”
The most complex part is likely to be how schemes identify qualifying pots, suggests Tax Incentivised Savings Association (TISA) technical director and TeX director Jeffrey Mushens. “If members are going straight from one job to another, you can envisage some kind of electronic P45,” he says. “But what if the member takes a career break to have children or take an educational qualification, or goes self-employed? There will have to be some simple way for a new scheme to identify that a dormant pot somewhere belongs to this new member, and that when pots are transferred they go to the right person, without leaving huge liabilities on the old scheme.”
From an insurer perspective, a PFM system will lead to large increases in the volume of traffic, and increase the need to be able to offer their customers greater automation and digital platforms, says Pegasystems director of insurance Tony Tarquini. “This has to mean offering a digital self-service capability to enable pension providers to react quickly to enquiries,” he says. “Organisations need to evolve to become a ‘digital enterprise’. They have to do this in a robust and scalable way, and they have to do it soon in order to meet deadlines for pot-follow-member, as well as all the other legislation.”
The issue of who should provide and administer such a system is also to be resolved. No one body is likely to have overall responsibility, says Spence & Partners DC pensions consultant Mike Spink. “It’s difficult to see how this can be anything other than a shared responsibility including the Department for Work and Pensions (DWP), The Pensions Regulator and the Financial Conduct Authority, as well as the principal industry stakeholders such as employers, trustees, advisers and providers,” he says. “With auto-enrolment and the recent Budget announcements, pensions are currently in a much better place than they have been for some time so any failure within the PFM processes must be avoided to ensure we maintain the current direction of travel.”
HMRC is likely to be involved too, says Mushens, although he is keen to see its involvement kept to a minimum. “HMRC has a good record and reputation with the industry on real time information and is used to dealing electronically with firms,” he says. “But anything HMRC does will not be for free, and any future changes that the industry wants will have to be agreed with HMRC and fall under their control. The best solution would be where HMRC keeps some unique reference for a pension scheme member and responds when a new employer asks about whether their new employee has a pot, and where it is. I’d then leave it to the market, given direction by DWP and regulators, to deliver an efficient economic and cost-effective solution.”
Menezes also believes HMRC has a role to play in the creation of a master database that could be used to track members across schemes. “This could help the scheme members in a number of ways, such as tracing lost or stranded pensions, helping them obtain lifetime allowance information across all their schemes, and can probably be self-funded through the fraudulent activity that could be highlighted by analysing the data,” he says. This could be built around an annual scheme event or updated to HMRC using real time information, as well as drawing on data from other sources such as the General Register Office death databases.
He stresses, however, that this should be all it is, and should not evolve into a platform that drives compulsory transfers between schemes. “Transferring a thousand members from one scheme to another is difficult enough,” he warns. “Transferring them to a thousand separate schemes will create enormous complexity for administrators. This would not be a simple case of building technology that could seamlessly pass the member’s funds quickly and cost-effectively between providers.”
Ultimately, the process will need to be governed by statute law, points out Aries Insight director Ian Neale, so overall responsibility for ensuring it works effectively would rest with the government. “The potential issues if it goes wrong are almost innumerable,” he warns. “These include reputational damage to employers, pension providers, other organisations involved in the process, the government – in theory – and even pension saving itself.” Clearly, this is something the industry needs to make sure it gets right.
Nick Martindale is a freelance journalist