Politicians are good at short-term issues, but often blind to the longer term build-up of problems, especially when they just grow gradually over time.
Since the launch of stakeholder pensions in 2001, it has been obvious that we would have a problem with small pension pots. One million stakeholders were sold in the first 18 months and, inevitably, many of those customers changed jobs or circumstances and stopped contributing soon after, leaving behind a residual entitlement of some value, but small value.
Automatic enrolment has just compounded this problem. We have added 5m savers already, and will add another 5m over the next couple of years as we bring the small employers into the fold.
If you look at the demographics, you will see that the 10m people coming in through AE are the ones that the pensions industry typically circumvented in the past, through devices like waiting periods, minimum entry ages and white collar-only schemes. Therefore the people coming in will often be low paid and likely to change jobs frequently.
The low pay issue is compounded by the AE contribution framework, which first deducts £5,824 from their salary and then calculates a minimum contribution of just 1 per cent of what is left from both employer and employee. So we are building up literally millions of pension pots, often measured in hundreds of pounds rather than thousands of pounds.
Steve Webb, who holds the record for the longest-serving pensions minister, got this problem and after careful consideration plumped for a system of pot follows member to solve the issue. And because even small pots would get gathered up into the next employer’s scheme, Mr Webb abolished the practice of short service refunds in trust-based schemes, which had at least acted as some sort of brake on the inexorable build-up of tiny pots.
But with cuts to government budgets being the name of the game at the moment, current pensions minister, Baroness Ros Altmann has kicked pot follows member into the long grass.
After 15 years of waiting for politicians to sort out the mess, some brave folk in the industry have cried “enough is enough”, and we are now going to sort this problem ourselves without government help.
Step forward the pensions dashboard. Basically, it will do what its name suggests: it will give consumers one place to look at to see all of their pensions and determine whether their direction of travel is one they are happy with.
We need a set of open industry standards, so that pension schemes can send member data to any one of a number of competing dashboards, but send it in the same way and be confident that the data will be handled and processed in an entirely compliant manner.
For pension schemes, this is a leap forward in communication. It breaks the idea that reporting is something initiated by the pension scheme and sent to members at a time of the scheme’s choosing. It is a 21st century solution to 19th century paperwork, and will allow members to pull information at times that suit them. The ritual of annual benefit statements will fall away for members that use a pensions dashboard.