Nick Meredith, Products Director, Equisoft in response to the DWP proposals on small pots says: We agree with the overwhelming majority of the pensions industry that has shown almost universal support for the ‘pot follows member’ approach over the last decade and we were surprised by the decision and the reasoning behind the choice by the DWP of a consolidator model. The only supporters of the latter would appear to be those organisations who would look to be consolidators.
We still feel ‘pot follows member’ delivers a much clearer solution for consumers while avoiding the complexity and cost of centrally procured government infrastructure. We also feel that some of the issues cited as to why ‘pot follows member’ was not the right choice, are not adequately resolved by the DWP’s proposed solution.
We have four main concerns with the consolidator model approach proposed by the DWP:
1) The default consolidator model relies on consumers being actively engaged and having a relatively sophisticated understanding of the small pots process. We know from experience that this is unlikely, and the proposed communications as part of the mechanism are far more likely to lead to concern or confusion.
2) We also have reservations over the proposed value limits as again, engagement from already disengaged individuals is unlikely to happen until meaningful pot sizes – say £10k as per previous industry recommendations - are achieved.
3) The proposed solution has an unfair risk / reward profile as it puts much of the operational effort on the ceding scheme while the consolidator gets the benefit from the ultimate transfer of assets and the resulting economies of scale.
4) Our biggest worry is the concept of a central government clearing house or register. This is in complete contrast to the current dashboard project where creating a central register was specifically ruled out. Centralised government procured systems do not have a great track record and we also have concerns about the security of consumers data and the potential for cyber-attack that creating a single, vulnerable target might lead to.
We believe that as it stands today this proposal is too complex, risky, expensive and will take significant time to deliver. In the meantime, the small pots problem continues to grow, and consumers are losing real value as their pensions wither away.
The way forward
We believe that given the DWP has signalled its intention to go down the consolidator model there are practical ways to improve the safety, efficiency and cost of the proposal.
We feel there are opportunities to use existing open transfer standards and elements of the originally proposed ‘pot follows member’ solution to create a federated model of consolidator information.
This would expedite solution delivery, thereby removing the need for central registries or pot data and only needing a simple solution for the allocation of pots to a default consolidator, if at all.
We hope that the DWP listens to the overwhelming sentiment from the pensions industry to consider refinements and improvements to the consolidator model. Regardless, the Equisoft team will be continuing to support our clients with solutions as they navigate these developments.
Gail Izat, Managing Director for Workplace at Standard Life, part of Phoenix Group said: "The government has proposed a default consolidation option, in which any deferred pots under £1000 will be transferred to a pre-determined consolidation destination. We have a number of reservations with this approach and would urge the government to revisit the concept of “pot follows member”.
“Our first preference would have been for a ‘pot follows member’, whereby pensions under a certain size automatically transfer when people change jobs. It’s an easy concept for consumers to understand and, in a charge cap environment, concerns about the value for money offered by receiving schemes are lessened. There is also the extra convenience with the “pot follows member” approach that the legislation already exists.
“We believe the consolidator model could run the risk of distorting competition, as the process for selecting the consolidators is not yet clear. If members are allocated to the first scheme they were automatically enrolled into, there is the risk of entrenching existing market positions. It also risks further complicating the pensions system for savers due to the potentially cumbersome nature of the process and complex terminology. This option requires the creation of a clearing house or central registry, the cost of which will be substantial and could outweigh the potential benefits of the solution. The establishment of a central data point also raises concerns around the security risk of holding so much pensions data in one place. When designing the Pensions Dashboard, it was agreed that there would not be one point of data storage for this reason, and the principle stands here.
“If the Government choose to follow through with the Default Consolidator option, then the process of selecting consolidators should be in the best interest of the saver. Existing market share should not be used as a basis, and a focus should be placed on the proposition that can offer the best outcome.
“Overall, we welcome the government’s renewed commitment to make progress on the issue of small pots. With the average person working more than 10 jobs in their lifetime, a side-effect of auto-enrolment has been the exponential growth of deferred small pots which is not in line with our ambition to engage people in better financial futures. Whatever the outcome we hope that a combination of the small pots initiative and pension dashboards can reduce some of the challenges in this area.”
Head of Master Trust Trustee Consulting, Hymans Robertson, said: “We are supportive of the idea of default consolidators with a central clearing house which will support the transfer of small pots to the appropriate place. We do however feel that a framework for authorisation is required to support this system and ensure members do not end up in poorer value for money arrangements. The detail of this framework is not clear at present. In addition, a robust system of safeguards is required for providers to ensure that the rules and processes are clear and do not leave them open to challenge. Finally, when you put this approach through the lens of DE&I, there will be a need for some form of filtering mechanism such that there are no detrimental unintended consequences on minority groups.”
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