Steve Webb was a politician long on vision but short on execution and no vision of Webb’s was less thought through than the big idea that we should all have “one big fat pot”.
So of all Webb’s pension models left to his successor, pot follows member was least developed, it sits at the back of the workshop with a few enthusiasts eagerly awaiting Ros Altmann’s patronage. These enthusiasts include Adrian Boulding and teams who have worked previously on re-registration of assets which has freed up the ISA market. I know these people, they are good people but they are losing their battle.
The issue is not whether but how pot should follow member and this necessarily requires us to know where the member is going. Right now, we are too early in the development of the products from which members will spend their pots, to answer this question with certainty.
The funds industry, which includes wealth managers and insurers as well as the fund managers would like a mass market to develop around what we know today as drawdown, there is an alternative view that the default decumulator will be some kind of synthetic annuity and there are a few traditionalist who anticipate the return of the old style insured annuity. In short – the long-term destination of the pot is unclear.
Add to this the issues of ownership that plague pension investment. Our money is held in policies established by insurers and often reinsured. Within these policies can lurk guarantees triggered by policy conditions making the value of ownership dependent on how and when benefits are taken. With-profits, guaranteed annuities , even guarantees on cash funds are commonplace in the legacy of policies the retiring generation have accumulated.
We do not know where we are going, we do not know what we own and what it’s proper value is.
There is a third and even more murky consideration, we have absolutely no idea what the market impact of the wholesale migration of assets from one owner to another, could have on the market. If there is one economic justification for the maintenance of inefficient insurance policies over decades, it is that the market impact of encashment and reinvestment is likely to be worse than keeping things where they are.
Executing the closure of one insurance policy and transferring the proceeds to another is not the same as re-registration. Things need to be stopped and other re-started, there are legal issues as well as investment issues and the investment issues are confused by ownership issues – in short, it may well be best to let some sleeping dogs lie.
But how do we determine which dogs to wake and which allow to doze? Where is the authority that tells those who want to automate the transfer system what’s inside the kennel?
Faced with the problems created by a partially formed decumulation market, confusion over the value and ownership of the asset and the uncertainty over the market impact caused by transfer, it looks like pot follows member is being put back in the “too-hard” box.
I have personally and on behalf of various companies argued that we need virtual rather than physical aggregation and that the only win we can anticipate over the next three years, is to see what we have rights to, on a single screen, hopefully in the palm of our hands.
Those organisations creating access to the policy values of our pension savings plans are creating value by allowing us to engage with our money, however distant the ownership of it may seem.
There needs to follow some education on just what the implications of moving money from the current ownership structure might be, If no informed choice is made, I would prefer to see no decision taken, an uninformed choice is (in these murky waters) typically a bad choice.
If people feel engaged and educated, let them be empowered to move pots around, that is what pension freedom is about. But let’s be sure that that there’s some light in the darkness first.
Most people will not engage and won’t undergo the kind of eduction needed to make decisions. For most people – a default pathway that takes pots to a safe home for spending- is devoutly to be hoped for. We aren’t there yet, and until we know where pots are going, nothing should physically follow.