The toxic transfer; be wary when aggregating pensions!

The DWP has published new statistics that support their contention that there is more economic value in the “pot follows member” model than the “aggregate to Supertrust” model.

The NAPF have of course countered and have calculated that under the aggregator scheme, an employee on half-average earnings saving for 45 years would have a pension of £82,000. Under the ‘pot follows member’ scheme, those savings could drop to £61,000 due to high fees and variable investment returns, according to their estimations.

I’m tempted to call a plague upon both their houses. This is pretty arcane stuff to all but the pension policy buff and as Tom McPhail has  tweeted….

If Option A’s to invest £millions of someone else’s money in a grandiose new system and Option B’s to the simple important jobs better, where do our priorities lie?

The question is relevent but slightly unfair, for the DWP, the answer is both,

The time horizons of the DWP are both short and  long; many of the projections in the document relate to retirees in the 2040’s and 2050’s and , in as much as the DWP is prepared to draw a line in the sand and create a system for the future, their thinking has merit.

However, “the future” needs to be a very different DC World than the past’s or the present’s. As has been pointed out in a report this week by NAPF and the PPI, auto-enrolment is at risk of frog-boiling the financially inept into the same legacy pension schemes as have been failing us these last twenty five years. Only today I hear of another large retailer who will be auto-enrolling into a GPP, the costs of which will be picked up by members through “adviser charging” (eg commissions).

Should we really be suggesting that people joining this retailer should be taking small pots from excellent DC plans without such charging into such regressive arrangements? (To be fair to the NAPF they are making the same point)

If we see questionable practice in the larger schemes (the one I mention will be enrolling over 8,000 staff) , what can we expect from the 2014 stagers – let alone those that follow?

For “pot to follow member” to work, we need to make sure that the tide is in favour of the consumer and that we are not creating an expensive merry-go-round where the only winners are those who benefit from the transfer transactions.


And then there’s the issues with transfers from legacy plans. Legacy plans- what  can best describe as a mixture of good DC plans which should become aggregators (but are as likely to be transferred- under “pot follows member”), difficult plans where there are legacy charges or guarantees that make transfer questionable either because those charges will crystallise or the guarantees be lost and finally those toxic plans where the transfer values are deliberately set to protect the ceding scheme, insurer and salesmen.

For twenty five years I have struggled with transfers and the values put on accrued DC rights. I have sold the vision of personal pension aggregation (with disastrous consequences), I have argued for a national clearing house (Eagle Star Stakeholder Submission 1998) and latterly I have argued for a national register that would allow people to track their pensions without having to make physical transfers.

I have been driven by  a desire to get people to manage their pension affairs holistically but am concluding that this is too hard for most people and too expensive,

There are undoubtedly things that can be done. We should be able to sweep up many of the small occupational DC pots using what used to be GN16 certificates. I am sure that the better employers will facilitate transfers from legacy to new workplace savings arrangements (where the “new” is better) and I am sure we will find new ways to provide advised streamlined transfer advice through good IFAs.

But this is far from solving the problems that underpin Steve Webb‘s drive to implement “operation small pot to big pot”!,

To do that we need to concentrate first of all on ensuring that all schemes that are established as qualifying schemes for auto-enrolment are of the standard of those that we have seen by the vanguard of stagers- the Boots, Asda, Marks & Spencer and Sainsburys to name but a few. These schemes are worthy to take transfer values from all but the most toxic of sources.


And if we are really to do something about the legacy, then we need to establish a system where we can tag transfer values with a mark of transferability. If toxic transfer values were labelled red – we could avoid them , if difficult transfers were labelled orange we could take advice on them and if transfer values were tagged green, we would transfer them.

To tag such transfers would require an effort on behalf of the insurance industry. I have no doubt that they would find ways to conform. Many transfer values from DB plans are already deemed toxic (other than when enhanced to make the transfer palatable). Insurers , under the code of “treating customers fairly” are already bound to point out the guarantees within their with-profits policies and more especially those policies that provide guaranteed annuity rates. Transfers from such plans are difficult and there should be a warning that they need to be advised.

And if insurers provide transfer values that are so penal that they cannot be regarded as “fair value” then advisers should be able to take  the insurer to the Ombudsman (and ultimately the FSA) to challenge the basis of calculation. It might be acceptable for a scheme actuary to protect other members of an occupational schheme with toxic transfers, but it is not acceptable for an insurance actuary to protect shareholder value by locking in policyholders to under-performing contracts. In both cases it is vital that consumers know that what they are being offered should only be acceptable in exceptional circumstances.

There is no quick fix here, just a series of little steps towards resolution. Operation small pot to big pot is likely to be an operation of attrition. We need to explore all solutions (including the recent proposals to use credit card technology as part of the solution) and consider this long term in R n D.

In the short-term we need to concentrate on making our schemes fit to aggregate to, focus on education and advice to members so they can understand what is “good” and what is “bad” and do something to make sure that transfer values are presented for what they are “good , bad or toxic”!

Oh and even more importantly we need to sort out annuitisation (did I say that before?).

About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
This entry was posted in annuity, auto-enrolment, dc pensions, defined aspiration, pensions and tagged , , , , , , , . Bookmark the permalink.

14 Responses to The toxic transfer; be wary when aggregating pensions!

  1. Mike Atkin says:

    It is all rather depressing Henry. It continues to bumble along to where, nobody knows. Fundamental to good pension provision is an employer who gives a damn. With DC they don’t have to and why should they. They will tweek the benefit when they need to and only then. Apologies to the very few employers that do genuinely give a damn. The only real counter to this is member engagement driving the changes neccessary to give them any chance of a decent pension. I’m not seeing too much of this. Trustees will gradually disappear as companies dump their responsibilities, sorry, members in to GPPs with a toothless governance committee. Relying on the industry to evolve to some sort of fair and benevolent provider will inevitably disappoint.
    These dark morning don’t help. 😉

  2. Andy Heath says:

    Henry – I don’t think I’d disagree with anything you say, but I also cannot fault Mike’s logic. It’s probably a chicken approach on my part, but I don’t think any progress is going to be made until there’s someone like a Pensions Ombudsman who can really bang a few heads together, and kick some arse. While the people making decisions have gold-plated pensions themselves they’re not going to be motivated to remedy the injustices of serial government incompetence regarding pensions (the future is always someone else’s problem), but someday someone will realise economies are going to collapse if we can’t all make some sort of intelligent provision for our waning years. Don’t expect commerce to be bothered to make everyone see sense, either.

    If you want the job, Henry, you can have my vote. And the best of luck to you!

  3. henry tapper says:

    I heard Steve Webb speaking at the Auto-Enrolment event well organised by Second Sight (thanks to all).

    He stated that he was looking to legislate on “pot follows member” in 2014-15 (eg in this parliamentary term).

    When asked what the position would be if a transfer was made from a good to a bad DC scheme he stated there would be no bad AE Qualifying Schemes.

    If he believes this then he needs to beef up the Regulator’s role and make sure that all DC schemes operate with an eye to the Regulator’s 6 good DC outcomes

    1. Value for Money- NEST is the benchmark
    2. Proper defaults that have statments of investment pricniples and abid by them
    3. Security of Assets- no fly by night nonsense
    3 Sound administration – straight through processing and transparent costs
    4. Proper comms for members so they can see what’s going on and intervene when they want
    5. At retirment options that include collective drawdown options such as ABDC’s Retirement Bridge
    6.Sound contribution collection (that makes it easy and effeceint for members to pay AVCs)

    If all DC plans abide by these principles we will not need expensive advice and we’ll be able to build toward DA through DC heavy. But let’s make this happen first!

    • Brian Fleetwood says:

      Well said, Henry. A couple more thoughts ..
      The new scheme wouldn’t have to be a bad AE scheme for there to be a problem – it just needs to be ‘not as good’. That might only be ‘not as good’ in terms of investment choice.
      Also, if the new scheme is a CARE scheme (presumably any rules disallowing TVs in are overridden) then a TV in would be into an AVC type of arrangement – do all those good CARE schemes have DC funds available with very low charging structure?
      The pot follows member is only really viable (and I guess the modelling only holds) if all schemes are the same, offering the same funds with the same charging structure. And that’s not going to happen.

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