Personal PensionFeb 17 2016

Keep all nest eggs in the one basket

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Keep all nest eggs in the one basket

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.

Today’s worker has, according to Department for Work and Pensions modelling, an average of 11 jobs in a career. And 25 per cent of us will have 16 or more jobs. If we are automatically enrolled into each of these, we will have very fragmented pensions. With the old system of annual benefit statements, we could be getting one annual statement every three or four weeks, but each only representing a tiny part of our pension. That would be a great volume of pretty useless communication, serving little purpose beyond keeping the local postman in a job.

With a pension dashboard, these will all be visible in one place, at the same time, with up-to date information.

While the benefits of a pensions dashboard to consumers are clear, the case is less obvious to pension providers. Some caution among providers is understandable – it is providers, not consumers, that have to meet the cost of delivering the dashboard, and if it disturbs an otherwise sleepy back- book then some of their business might walk away.

On the upside, though, there may be savings in not having to send out benefit statements and more engaged customers may be more likely to increase contributions or pay in lump sums. And if there is a feedback loop, with the dashboard able to tell providers what screens the consumer is looking at, then much improved targeting of pension increment marketing campaigns becomes possible.

Ultimately, it is consumer behaviour that will determine whether dashboards achieve wide coverage or not. If the concept is popular, then users will soon tire of non-participating schemes where they have to enter details manually and they will transfer those pots over to more modern providers.

There is much work to be done to get the concept up and running. Data protection is a major issue, and we need a set of protocols around how consumer permissions are asked for and how the data is used.

A greater challenge will be identifying consumers. It is not unusual for a consumer with three pension providers to have minor differences in the way each one of them has recorded their name. Even dates of birth and national insurance numbers may be wrong, as all too often these have been manually noted down at the outset of employment, and perhaps manually entered again onto the pension provider’s website at the moment of joining an employer’s pension scheme.

Work going on elsewhere in the Tax Incentivised Savings Association in the field of a digital identity for financial services has the potential to be a real help in matching the right accounts to the right consumer on a pension dashboard.

I am optimistic of a great future for pension dashboards, believing that they are the right policy response for today’s consumer lifestyles. To get there will require key players in the industry to work together to share problems and solutions for the common good.

There is a strong case for us making a joint effort on a project that has the potential to get consumers to a better place with their retirement savings.

Adrian Boulding is policy director at the Tax Incentivised Savings Association

Key points

The idea of a pensions dashboard has been developed to deal with the large number of small pension pots people will be accumulate over time

It is consumer behaviour that will determine whether dashboards achieve wide coverage

A greater challenge will be identifying consumers who may have changed addresses and names