Industry members have responded to the Department for Work and Pensions’ call for evidence on small pots issue, with some arguing there is need for “further discussion”.
The DWP’s consultation looked at addressing the growth of deferred small pots in the automatic enrolment (AE) workplace pensions market.
Responding to it, Interactive Investor expressed its concern that the current consultation is too narrow and should include a pension choice model with the option for workers to choose their pension provider.
It argued that adopting an automatic consolidation model removes member choice, erodes member responsibility for their retirement savings and increases the sense that pensions are complicated.
Adopting a ‘pots follows member’ approach erodes pension flexibility, it explained.
Alice Guy, head of pensions and savings at Interactive Investor, said on the whole, auto-enrolment has been a roaring success, but the current system still has many flaws and is due for a health check.
“Many workers have an array of smaller pension pots, accumulated through many years of working for different employers,” Guy said.
“And self-employed workers are often left behind under the current system, disengaging from pension saving once they become self-employed.
“But instead of a ‘pot follows member’ approach, we think people should have the freedom to engage more positively with their pension.
“A member may be happy with their old pension scheme or be planning to consolidate pensions using a lower cost option, eg, a Sipp. There can be no assumption that a new job means a better pension, either in choice, value, or performance.”
Interactive Investor said it supports pensions choice and the ability for pension savers to be able to choose their workplace pension provider and to bring forward the pension dashboards solution.
Simple implementation
Meanwhile, Kate Smith, head of pensions at Aegon, said the rapidly expanding number of small frozen pension pots is a symptom of the success of auto-enrolment and the lack of engagement by savers with their pensions.
She said: “The reality is that many of those with small frozen pension pots are low earners who move jobs frequently and are likely to be the least engaged with their pension savings.
“This means that any solution needs to be built around the auto-enrolment principles of inertia, or ‘going with the flow’.”
Smith argued that any reliance on members making active decisions, for example by choosing their pension consolidator, is likely to fail given their level of engagement.
“Any small pot solution needs to be simple to implement, understand and communicate, with as few member choices as possible but delivering a good member outcome, setting them up for later choices,” she said.
“The consultation touches briefly on the ‘first pension pot for life’ solution. The idea here is that the first scheme the member is auto-enrolled into becomes their default ‘life consolidator’.
“We believe this option merits further discussion and may be more achievable in a shorter timescale than building an authorised consolidator regime or ‘pot follows member’ solution.”
However, other members are supportive of the approach.
Richard Birkin, head of DC pensions at Isio, said he is strongly supportive of the pot follows member approach, stating that it is through their employers that the vast majority of members will most actively engage with pension provision and where they will experience the most proactive communication and support.
“This need not operate in a way which creates a significant new burden for employers,” he said. “Advantages of this approach continue when considering an individual’s current employer and the extent to which they will be motivated to ensure the pension pot is well managed, especially in comparison to previous employers.
“Ongoing schemes will be more up to date with current-market best-practice when compared to legacy schemes.”
Value for money
Elsewhere, Broadstone has called for half a dozen consolidators and a transparent regulatory framework to deliver value for money (VFM) for pension savers, in its response to the DWP’s consultation on small pots.
David Brooks, head of policy at Broadstone, said: “With billions of pounds accumulated in small pots, a transparent and simple solution could provide a boost to many people’s retirement incomes.
“An effective consolidation model would be low maintenance for both members and sponsors, ensuring value for money.
“It would leverage the anticipated success of the pensions dashboard in connecting members with their pension pots and engaging more people with their later-life savings.”
Broadstone said the government should provide a minimum pension age override so schemes do not need to amend rules to accept a benefit with a lower normal minimum pension age and exempt hybrid schemes where members may benefit from interaction with a DB scheme for PCLS purposes.
It did not think the pot follows member option should be pursued.
Isio's Birkin added that he is supportive of the regulator’s attempt to improve value across the industry, however, the current proposal is unlikely to go far enough.
“A much firmer stance is required to manage the challenges that can arise when trustees assess value,” he said.
“Trustees with the ability to cherry-pick schemes will likely make own-trust to own-trust comparisons.
“This is not necessarily indicative of value for money across the industry, and actually, the very best schemes should be used as a ‘gold standard’ comparison.”
To enable cross-consultancy comparison, he argued that greater focus should be placed on the construction of industry-wide benchmarks to enable a more scientific approach to comparing value.
He explained that until the regulator is able to centrally assess value, he believes value for money assessments will continue to lead to inconsistent outcomes across the industry.
“The regulator should focus on constructing a centralised reporting system to effectively measure industry wide value, ensuring they are confident the data required to be reported is indicative of good value and good outcomes.”
A DWP spokesperson said: “The average worker will have around 11 jobs over the course of their career, meaning they may accrue multiple small pension pots.
“This creates a risk of members losing track of their pension savings and creates cost and inefficiency in the system.
“Our call for evidence sought feedback on workable solutions, enabling savers to achieve better outcomes at retirement. We will carefully review all responses and respond formally in due course.”
sonia.rach@ft.com
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