Pension transfer utopia possible if industry can unify standards

A forecast surge in transfer volumes coupled with political pressure for speedier transfers will leave some administrators struggling.

But there are some industry developments that might yet bring some relief to both administrators and long-suffering scheme members.

The key driver of pension transfers over the next few years will be the pensions dashboard. Although the original launch date has been delayed, in our view, as a software developer to the programme, it is highly likely that the first public access will go ahead be in 2024, in spite of some dark commentary to the contrary from the market. 

Compounding these problems is the disparate nature of the UK pensions industry with multiple regulators and sectors.

The dashboard when launched will for the first time allow individuals and their advisers to instantly see all their pension in one place. Although not a stated objective, it is generally accepted that this will trigger much demand for pension consolidation, creating a bow wave of pension transfers.

In many cases these transfers are likely to be from older corporate and public sector schemes – in other words, those schemes with the most antiquated transfer processes.

Looking further ahead, the Department for Work and Pensions has once again opened the lid on the small pots problem. The original programme was shelved following the 2015 election, but the proliferation of small pension pots has continued unabated and can no longer be ignored.

Having done another loop around all the potential solutions, the DWP has just completed a consultation exercise, and now seems likely to settle back where they started with Steve Webb’s preferred pot follows member solution.

Transfers too slow

On top of the rise in transfer volumes there is demand from everyone, from the pensions minister down, for much faster pension transfers – actually, I think it was the last pensions minister not the current one who wrote to the worst-offending administrators, but with all the ministerial hokey-cokey it is hard to keep track. 

There is little patience left for transfers that take months and the expectation now is that administrators should aim for just a week or two.

However, transferring pensions is still beset with hazards.

We can never get all the disparate parts of the pension industry to buy the same system or run exactly the same process, but it might be possible to get them all to use the same interoperable standard.

Despite pressing for ever-faster transfers, the various regulators have launched a host of new regulations, in theory intended to safeguard members, but in practice unintentionally hampering much-needed process improvements.

Some administrators taking the regulations as stated are referring pretty much every transferring member to the government advice service MoneyHelper.

Compounding these problems is the disparate nature of the UK pensions industry with multiple regulators and sectors each with different products, rules and priorities.

There are even different and incompatible pension transfer systems: open transfers from TeX and an older privately owned system originally set up by the life offices from Origo. All investment Isas are transferred the same way, but pensions, as ever, are more complicated.

As a result, too much of the industry is still bogged down in archaic and time-consuming paper processes, either through lack of bandwidth to cope with yet more change or nervousness of unwittingly introducing new unforeseen transfer risks.

Making progress

But enough gloom. As it turns out, there may be some cause for optimism.

Transfer processing, at least in some parts of the pension industry, has improved dramatically over recent years.

Following the Financial Conduct Authority's making transfers simpler, and thanks to TeX open transfers, most platforms now offer electronic cash and in-specie pension transfers. Good administrators will process transfers within a week or two and some in-specie transfers are done in a couple of days.

Over in the corporate pension world there also seems to be progress at last. The ViaNova group of leading administrators, with a preference for open standards, have adopted the TeX approach.

With such uneven transfer service provision across the industry, advisers need to understand who supports which service.

Since the advent of pension freedoms, huge numbers of corporate scheme members are transferring to modern platforms for drawdown products as they reach or near retirement, so the choice of a common standard across both sides of the industry is a great step forward.

Uptake is growing but still limited at this stage. Advisers should check the transfer pack, which often indicates whether ViaNova/TeX transfers are supported and with which platforms.

Prompted by the ViaNova group, TeX is now in the process of adding support for defined benefit transfers and this should accelerate support.

With such uneven transfer service provision across the industry, advisers need to understand who supports which service if they are to do the best for their clients.

Can the client stay invested in the market or will they need to cash out? Can they expect the transfer to take six days or six months? The implications of a good or bad transfer service can have quite a dramatic impact on the investor.

Can this situation ever improve? Can there ever be a day when all providers offer the same good service using the same standards? Pension transfer utopia, if you will. You may think I am being overly optimistic, but I think it just might be possible.

New regulations intended to safeguard members are in practice unintentionally hampering much-needed process improvements.

You will have gathered by now that I am a fan of TeX open transfers. It seems to me the right way to go about harnessing the might of technology and competition for the benefit of the industry and its customers.

TeX does not sell technology or run any central infrastructure. Instead, it provides a framework of legal, operational and technical standards to which members must comply and leaves technology to market competition. It is not-for-profit, highly collaborative and equitable: every member gets one vote and everybody can attend the various committees.

We can never get all the disparate parts of the pension industry to buy the same system or run exactly the same process, but it might be possible to get them all to use the same interoperable standard, and with TeX and ViaNova we have already made much progress towards that goal.

One scenario that would make it almost inevitable is renewed backing from the DWP. In their 2015 paper on implementing pot follows member, they proposed to mandate the TeX standards to support small pot transfers.

If, as looks likely, they return to the pot follows member solution and decide not to reinvent this particular wheel but reuse their good work from last time, then this would surely result in ubiquitous support for the TeX open standard.

So, while we may not yet quite have reached the sunlit uplands of transfer utopia, I think we at least have a glimmer of hope.

Nick Meredith is products director of Equisoft