By Dale Critchley, Workplace Policy Manager, Aviva
The aim is to deliver a relatively small number of very large pension schemes on the premise that these would deliver better outcomes for savers.
Economies of scale are factors which can deliver better pension saving outcomes. Scale can allow for automation, making administration more efficient, but it also means providers can invest in online services that offer savers the opportunity to manage their pensions more easily. The idea is that more engaged savers should make more informed decisions which could drive better retirement outcomes.
Scale also provides the benefit case for innovation in areas like retirement solutions. Small pension schemes might struggle to justify the cost of investment in an area that impacts a fraction of their members each year. While a provider that administers thousands of pension schemes with millions of members can deliver benefits to thousands of retirees each year.
Scale can also enable opportunities for investment in a more diverse range of asset classes. This has been seen in Australia and Canada, where some of the largest pension funds have invested in infrastructure projects around the world to diversify returns for members. Scale may also allow for bigger investment management and governance budgets, potentially producing higher returns, and better run pension schemes.
Well managed, efficient, and innovative pension schemes which deliver higher returns from more diversified investments, is the consolidation vision.
The problems associated with numerous small pension pots have been talked about in the industry for some time. With low levels of engagement, poor decision making when taking benefits, high administrative overheads and lost pots, all common. The smallest pension pots, which are under £1,000, are due to be automatically consolidated to help address the issue and legislation is expected to be included in the Pension Schemes Bill next year.
This development is likely to allow the transfer of savings of workplace personal pension members to another pension scheme without requiring their consent. If extended beyond small pots this could enable similar to those under occupational pension schemes where schemes can consolidate benefits if it is in the savers’ interest.
Outside of regulation and legislation, there is action that individual savers can make to track down and consolidate their pensions. The Pension Policy Institute calculates there could be 2.8 million lost pension pots in the UK, worth £26.6bn. The Aviva Working Lives Report 2024 found that 41% of employees say they have multiple pension pots and 29% don’t know how many pots they have. Almost three quarters of employees (73%) want help tracking down their pensions.
The introduction of Pensions Dashboards will be the next big industry-wide step in helping people track down their pensions. However, data limitations might mean they can’t provide all the information required to decide on whether to consolidate a pension. But there are now already innovative services available from providers which offer detailed reports showing charges under old pensions and valuable features like guarantees.
While the benefits of consolidating a pension might include lower charges, higher investment returns and easier financial planning, the biggest potential benefit could come at retirement. Managing multiple pension pots while saving can be difficult, but it might be even trickier to consider multiple sources of retirement income and the underlying investments while making choices at the all-important retirement stage. Which is why the word ‘consolidation’ should be a consideration in every retirement plan.
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