Whether you’re moving house or moving money, the process is fraught. We are no closer to pots following member than when the “portable personal pension” was established in 1987. The friction involved in moving money from scheme to scheme, fund to fund, asset to asset means money tends to stay where it is.
But for those wishing to consolidate their pension savings, there are barriers to transfer that surmount these operational issues. Chief among them are the issues to do with guarantees – the guarantees surrounding the payment of a pension as opposed to lump sums. Since the cost of meeting these guarantees is determined by the markets, their value should be calculable at a market rate. But what price can you put on human longevity?
These are hard questions. It is easy to open Pandora’s box and allow pension freedoms out, but it’s harder to ensure that people get fair value from their pension savings.
These hard problems have not yet been properly addressed. We are good at making financial judgements based on critical yields but we are bad at helping with decisions demanding emotional intelligence. People’s objectives in later life do not overlay neatly onto the income streams of a conventional inflation linked joint life annuity typically offered by a defined benefit occupational pension. The success of Pension Increase Exchange programs – a form of transfer- suggests that many people would prefer more income sooner rather than higher income in their last phase of life.
And simple critical yield calculations can take no account of individual life expectancy. Should those with years or months to live, be treated as if they will live on for decades?
Depending on whether you look at the questions around transfers through a financial or emotional lens, you will get different answers on what to do.
In my experience, making decisions based on such complex judgements is extremely hard and people tend to be polarised in their behaviours. At one pole, their is a meek acceptance that to stay put and do as one’s told is prudent. At the other, we find people digging in their heels and demanding freedom. These are our insistent customers.
For most people, a balanced approach is needed. Hopefully we will find a synthesis between the polarities but there’s going to have to be some common sense applied to get there.