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.
WE NEED ALL SCHEMES INTO WHICH PEOPLE ARE AUTO-ENROLLED, TO BE UNIFORMALLY EXCELLENT.
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.
WE NEED ALL SCHEMES INTO WHICH PEOPLE AGGREGATE, TO BE UNIFORMALLY EXCELLENT.
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?).
Related articles
- Pensions ‘could lose quarter of their value if you change your job under new reforms’ (dailymail.co.uk)
- Scale and scalability- why L & G is the cuckoo in the Nest. (henrytapper.com)
- UK News: Changing job ‘could hit pensions’ (walesonline.co.uk)
- Changing job ‘could hit pensions’ (express.co.uk)
- Changing job ‘could hit pensions’ (standard.co.uk)
- Getting CEO’s and Chairmen “comfortably” relaxed about pensions. (henrytapper.com)