The Government has recently announced that it has suspended plans to require that defined contribution pension pots of less than £10,000 automatically transfer when savers change jobs (and related pension arrangements). Although the legal compulsion for such transfers has been placed on hold, why should automatic transfers (irrespective of pot size) not become established practise in any case?
Consolidating a saver’s pension pots, and ideally other investments too, in a single place has a number of benefits:
- The single point of contact makes it easier for savers and their advisers to stay on top of their savings, facilitating more efficient planning and administration;
- The larger the quantum of savings, the more cost-effective management is likely to be too. Fixed fees are spread across a larger asset base, reducing their proportionate impact. Fee breaks related to size of assets will be more easily reached as well;
- Providers will have to maintain fewer sub-scale and/or dormant clients, who are likely to be uneconomic to service in any case. While the provider’s total number of clients will likely fall, the average value of assets per client will likely rise and overall profitability might well be enhanced; and
- Savers put further distance between themselves and their former employers. The same holds true for employers too.
Account switching services have become increasingly common over time, particularly in the digital age, across a number of industries. The best are painless and efficient although some ceding providers can undermine the process. Development of switching capabilities in financial services has been both Government-driven (e.g. current accounts) and voluntary (e.g. discretionary investments). There is already at least one group, the TISA Exchange, that has established and implemented protocols for the electronic transfer of pension savings.
Consolidation of a saver’s pension pots is, to my mind, a case where savers, providers, employers and advisers all benefit, particularly in an Automatic Enrolment environment. Why should Government intervention be needed to deliver this benefit? Switching is not a foreign concept to most of us in many aspects of our lives. The technology to facilitate this switching of pension savings is proven and operational in the UK. One way of stimulating more widespread provision of switching facilities is to make the presence of such a facility a selection criterion when choosing a provider. If the provider can’t/won’t facilitate switching why not switch provider?