Mercer welcomes further clarity from the Department for Work and Pensions (DWP) on the issue of consolidating small pension pots. However, the firm warns that it is not evident that the current proposals would actually benefit pension scheme members who change jobs frequently, and that they require the pensions industry to overcome great challenges at a time when it already has a lot on its plate.
In the paper; ‘Workplace Pension Reform – Improving transfers and dealing with small pension pots’, the DWP states that an automated transfer system is the best way forward and that a system in which small pots follow people through employment is the option that will achieve the most consolidation and generate the most administrative savings in the long run.
Mercer highlighted that, from an administration point of view, such a consolidation project is likely to involve great challenges and more up front cost for employers and the pension industry. Rich Tuff, a Principal in Mercer’s Outsourcing business, said: “To make the consolidation of small pension pots work in practice, the pension needs to follow the employee as seamlessly and as automatically as possible. Ideally employee data and money would transfer via a central clearing house solution, say, where no manual intervention is required and costs are kept at a minimum.”
Mr Tuff continued: “Without this, the transaction and administration costs associated with thousands and thousands of transfers each year will be huge, as will the additional administrative burden on employers and pensions providers. However, developing an industry-wide clearing house infrastructure is hardly the light-touch option. There are pockets of experience in the industry where we see this sort of thing working, but to take those examples and make them industry-wide will be a challenge.”
“It would be a real shame if the Government looks to the pensions industry to take on yet another self-funded infrastructure project that is unlikely to break even for decades - especially at a time when the industry is already grappling with a number of other costly initiatives,” added Mr Tuff.
From the pension scheme member perspective, Mercer sees the proposed solution as an important step towards reducing the risk of individuals failing to manage their pension arrangements, but is concerned that the costs involved with moving might have a detrimental impact on accrued savings. “The issue of small pots is often seen as a real barrier to employees engaging in retirement planning and this will only get bigger once the upcoming auto-enrolment regime has been implemented,” said Roger Breeden, a Principal in Mercer Marsh Benefits. “Consolidation can help many pension scheme members to make more effective choices at the point of retirement. Members are, in general, likely to take better care of a larger pension pot, including putting time into making the right investment choices, so overall this has great potential to improve retirement outcomes.”
Mr Breeden added: “In the case of the frequent job changer however, moving the accrued pot with every job move could mean a build-up of administration and investment transaction charges that ultimately erode some of its value. For example, for an individual who changes jobs roughly every 3-4 years, this could mean their initial pot is transferred at least a dozen times over their careers. With the Government’s initiative intended to improve the retirement savings outlook for exactly this type of member, it is important that this potential disadvantage is addressed.”
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