The lads say “provider follows member”.

John Lawson

A story feeds in from IFA digimag “New Model AdviserTom

Hargreaves Lansdowne head of pension research Tom McPhail and Aviva head of policy for pensions and investments John Lawson have been campaigning for an alternative system which would mean employees’ pots can stay with one scheme, despite them moving jobs.

The alternative regime is based on auto-enrolment technology that would allow new employers to make contributions to an employee’s previous scheme, meaning the pot would not have to move.

Despite the government’s moves towards ‘pot follows member’ Webb has asked Lawson and McPhail to write to the Confederation of British Industry (CBI) to survey support for their proposal.

McPhail said: ‘What Steve asked us to do is to write to the CBI about it. He wants to know what employers think. What he doesn’t want to do is set off down the road [of ‘pot follows member’] and have all the employers turn to him and say: “if you do that, that’s us done with pensions, we’re not interested anymore”.’

‘So John Lawson drafted a letter, and I’ve sent it off to [director general] John Cridland at the CBI with a copy to Steve Webb, and we’re waiting on a CBI response.’

I support this approach as a step forward from the calamity that would result from Steve Webb’s original proposals. If it starts a debate on the practicality of creating a holistic DC plan at a reasonable cost to member, employer and provider then that in itself will have justified the intervention,

The technology alluded to is available and in use in Australia.I’ve written about it in earlier blogs. It’s provided by Superchoice and is a digital carousel which points at any one of a number of Australian supertrusts, links a new employer to the member’s old supertrust and decouples an employee who has left so their new employer can pick up where the old on left off.

Effectively – it’s provider follows member.

This is not what the NAPF had in mind when they put forward the use of supertrusts as dumping grounds for deferred members. The essential difference between the Aviva/Lansdowne proposal is that (providing there is a new employer to go to) the old put is funded by the new employer.

This means that while the employer starts out funding their chosen workplace pension, they will in a few years be funding lots of other schemes till the rump of employees still in the original scheme is matched by numbers from other schemes.

Effectively this breaks the link between the employer and the employer’s scheme. What happens is that instead of the employer having its pension arrangements, it funds the pension arrangements of its staff.

Now both Aviva and Hargreaves Lansdowne are providers of workplace pensions, both provide GPPs (albeit quite different types of GPPs). This proposal is idea for a GPP provider who has nothing to gain by small pots and much to gain if they can increase the duration of payments into the pots they manage. However Tom and John will no doubt argue that this argument is equally true for the managers of mastertrusts. The howls of rage, if Cridland and co support the argument, will come from employers who run their own occupational pension schemes.

Occupational schemes will not be able to follow members around, For them the tide will go out and will leave them exposed as anachronistic unwieldy and pretty useless. Consequently you can expect the NAPF to be counter lobbying this proposal and I can imagine a high level summit twixt Seagers and Cridland at Le Coq d’Argent or similar someday soon.

I am of course being fanciful but you get my point. Any wholesale reform of the complex relationships between employer/provider and member has to take into account the enormous vested interests that have built up over time and are associated with the huge revenues that attach to the trillions or so in the megapot.

The worst thing that could happen with pot follows members is a compulsory regime where members pots are cashed out and cashed into new pots. The costs would negate any benefit ten times over.

The Aviva/Lansdowne proposal is  half-way house that will please some but annoy others. It is workable as is shown in Australia but would do to occupational pensions what Beeching did to the railways.

The third way, and the obvious answer, is to rely purely on a technology solution. There is a national register of pension rights in this country, it was built by the DHSS ,passed to the DSS and is now the property of the DWP. It tells us what we are entitled to by way of state benefits and can even calculate how are state benefits diminish if we contract out into private pensions.

Rather than reinvent the wheel, let’s see if we can’t attach to this database , the details of all the pots under scrutiny whether they be big and fat or scrawny little things.

Rather than cashing out units, let’s virtually aggregate these pots so what the member sees is one big fat pot even though its held by lots of different providers.

There is going to come a point when all the units in the big fat pot are sold for pension (or drawn down as a pension) but the cost of selling units from 7 schemes should be no higher than from one scheme and if 5-10% of the virtual big fat pot has been saved by not being cashed out along the way, we have a better system.

A better system that is for everyone but the various layers of intermediation who would feed off the transfer of pot to pot under the current proposals and the GPP and mastertrust providers who would be stuck with their share of little pots.

The view from Cap’n Webb in Caxton House is that people don’t want lots of little pots and get discouraged when they have to start all over again every time they move job. This is surely right- fractured benefits lead to fractured confidence and is part of the problem with pensions today.

The extension of the existing national database to include private pension pots can be managed on a phased basis and is an IT project which could be centrally funded. It would require co-operation from GPP providers, from mastertrusts and from the administrators of occupational schemes. It would have little cost to employers and would greatly benefit members. I submitted this idea at the time of the original pot-follows-member proposals and will continue to argue for it till all hope is lost.

I have nothing to gain personally from this idea, I aggregate my pensions into my latest GPP as any industry professional should, but I know that what I can force through for myself is beyond the capacity of 99% of the people I know.

All I have to gain from promoting virtual aggregation and supporting Tom and John is  some kind of obligation to do the right thing for pensions. Tom and John’s is a brave solution that I suspect will flounder on the exposed rocks of occupational schemes, mine is a worthy pipedream that has never been tested.

Pot follows member can only happen once we have thoroughly tested all options. In putting their heads above the parapet, the lads are taking the argument in the right direction.

About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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3 Responses to The lads say “provider follows member”.

  1. andyjags says:

    Great to read this. I have always thought it was the solution, although it is not my area of detailed expertise. Oddly, I was ranting about it to one of my bosses yesterday, without being aware of the Aviva/HL contact with Steve Webb.
    Obviously employers are important here, but not just those represented by the CBI who seem key as they (and the NAPF) have a very select group of members, and as you say, e scheme follows members does not work easily for the fragmented world of UK pensions. But that should be a problem to solve rather than a barrier to sensible progress for the vast bulk of employees who can expect relatively small pensions in retirement and for whom keeping in touch with all entitlements and not being subject to unnecessary frictional costs is more important.
    With an assumed potential 50 million small pots over the next 50 years, it seems inefficient to move them all around. NI numbers seem an obvious basis for people and employers to be able to search for pension membership and entitlement. After all, employers pay salaries to a variety of banks, so why not to a variety of pension providers?

  2. Amanda says:

    I think it is a fair question to ask if there is a need to amalgamate all your pensions into one place when it may well be preferable to diversify your risk. Just as with other financial transaction, each time there is a transaction there are costs, not just for the administration, but there may be bid offer spreads on the underlying investments etc. If a member changes jobs every 2 years, they could potentially lose x % each time. Cumulatively this cannot be in the members best long term interest.

    The only time amalgamation really becomes a practical issue is when the member retires.

    Certainly it should be possible for all pension schemes to be centrally registered, there could be a national database held by government to show where pension benefits are held for each person. ( possibly built upon what is already in place). Information can be collected via the annual tax return and pension providers etc.

    The big problem with the Government being perceived as encouraging pension transfers, is that it is very difficult for most members to distinguish between a good or bad transfer, as funds under DC grow this will only continue to attract criminal organisations to attempt to commit a fraud on peoples pensions, ie pension liberation etc.

  3. Thurstan Robinson says:

    Your ‘third way’ already exists in the Netherlands: mijnpensioenoverzicht.nl (try saying that after a few beers). The Dutch can log into the website and see how much money they have saved into which pension plans (including the state pension) and what they can expect to receive upon retirement. It also provides links to the different pension providers, should you wish to or need to contact them.

    I believe Denmark has a similar system in place.

    A mandatory aggregated reporting system like this seems to be a (relatively) simple but effective way to help people gain control over their retirement savings or at least have some idea of what income they can expect in retirement. It also has the benefit of being free (for the end-user) and available to everyone.

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