Kate’s comments address three key points:
• Pension transfer costs need to be eliminated before forging ahead with a small pots solution
• Scheme consolidation must come first before small pot consolidation
• Prioritise the value for money framework and dashboards before small pot consolidation
Kate Smith, Head of Pensions at Aegon, said: “Nearly every job comes with a pension but the UK’s fluid job market and general lack of engagement with pensions means the challenge of small, deferred pension pots is growing fast.
“The government’s preferred solution to address this challenge is to encourage a small number of existing large schemes, specifically master trusts, to apply to become authorised default consolidators, for small pots valued sub £1,000. This includes the use of a clearing house or central registry to match small pots to their chosen consolidator or to allocate one, if the member hasn’t selected one.
We believe this model is fraught with complexity and cost and believe more consideration should be given to other solutions including ‘pot follows member’.
“A major barrier to any automated small pots solution is the total scheme cost of making pension transfers, which varies by scheme between £30 and £80, as indicated in the consultation paper. Until these costs are eliminated, and truly automated, with no human intervention, and communications fully digitalised, it’s hard to see any small pots solution being achievable or cost-effective. We urge the government and regulators to work with the pension industry to investigate ways to reduce transfer costs before forging ahead with any small pots solution.
“Small pots consolidators will have to demonstrate the highest value for the member under the proposed value for member framework. The framework, once in place, will naturally drive consolidation into larger schemes providing better value for money.
Surely it makes sense for scheme consolidation to happen before attempting consolidation of small pots at individual level. The concept of attempting individual and scheme consolidation at the same time is highly problematic. It makes no sense for a scheme to be a small pot consolidator if it is then, or becomes, at risk of being wound-up or consolidated if it offers poor value.
“Rather than focusing on building a small pots solution at the same time as other government pension initiatives, we believe the government should priortise the value for money framework and getting dashboards up and running. Both may go some way in helping to solve the small pots problem. The government’s own analysis of the Mansion House pension reforms shows that for a median earner, the proposed small pots model will only lead to a miniscule increase in pension pot size of around £700 at age 65, compared to an increase of over £11,000 following the implementation of the value for money framework and a whooping £34,700 for implementing the 2017 reforms to auto-enrolment. This is where the energy and resources should be directed, to really make a difference to member outcomes.”
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