We all know the problem but it was well put in a recent NOW pensions press release.
“There has been a stratospheric rise in pension saving since the introduction of auto enrolment. The ONS data shows that active membership of private sector DC schemes has risen from 1 million in 2012 to 7.7 million in 2017. This makes very encouraging reading….
“One of the side effects of auto enrolment will be an explosion in the number of preserved pension entitlements. The ONS data shows that this is already happening with an increase from 11.2 million in 2016 to 11.6 million in 2017. This underlines the needs for the Pensions Dashboard which would help people keep track of their growing number of pension savings.”
Showing people what they have is one thing (it’s a dashboard), but giving people a steering wheel and a means to drive forward is quite another.
Pot proliferation is a threat to workplace pensions
Speaking with another prominent master trust on Friday, I realised that it’s not just the consumer that needs small pots to move on. Back in the 1990s I saw how small pots ruined the economies of scale achieved by the Kingfisher DC plan – unable to bring charges down because of the cost of administering deferred member’ tiny pots.
I fear the same will happen with auto-enrolment workplace pension providers. For all the economies of scale from the increased assets under management, the profitability of a master trust will be dragged back by the millions of small pots they are building up.
Even a not for profit pension scheme like People’s Pension or NEST pension can do nothing since its primary purpose is to stay in business to pay the pensions in years to come. For the “for profit” sector, we are already seeing consolidation and a drop in service standards as firms like Standard Life and Legal and General struggle to justify being in the workplace pension market to shareholders.
The proliferation of small pots poses an existential threat to workplace pension providers and must be addressed if we are to continue to have the world-class workplace pension system we enjoy today.
Government intervention may not be the answer.
As with the pension dashboard, it is unlikely we will see Government wanting to fulfil on the delivery of the solution. When Ros Altmann dumped the Steve Webb “pot follows member” initiative in 2015, it was because there weren’t enough resources in the DWP to make it happen (the same reason that CDC regs. weren’t pursued). As with CDC, the policy went away , but not the problem. CDC has been forced back onto the Government’s agenda by demand from a large employer, it is likely that pot-follows- member may also return to the policy agenda. But it will take a major catastrophe (such as the failure of a workplace pension provider) for that to happen any time soon.
If we are to see a solution to the pot-follows- member problem, it will have to come from the private sector. If the private sector can create an initiative that captures the imagination of the public – and so Government- then DWP and Treasury engagement may follow. But the ball is in the provider’s court.
I think that sitting back and waiting for Government to legislate is not the way for workplace pensions to get consolidation. They will have to get off their backsides and make this happen for themselves. Government intervention should not be relied on, indeed Government interference would probably cause more harm than good at this stage.
What can providers do?
There is a need for workplace pension providers to work together harmoniously to solve the problem of pot proliferation. A pure pot follows member system would see the pots from one period of employment transfer to the pot of the next employer. Leakage from workplace pensions would happen only when someone chose to transfer out of workplace pensions – say to a non-workplace pension that offered attractive features.
I suspect that most workplace pension providers would – despite some leakage outside their network – become more profitable from pot- follows- member
- They’d see assets under management remain the same
- They’d see administrative costs fall
Add to this the increased engagement of ordinary people in their “one pot” pensions and you have a recipe for more voluntary contributions and greater member loyalty over time. When members start asking their next employer , who their workplace pension provider is, then we may even see employers pressing for clearing to multiple workplace pensions (the Australian system).
This will only happen if we can make the process of moving one pot to another easy and happy.
Below I give three handy tips to the CEOs of the mass market pensions. Helen, Patrick, Troy, Andy E, Emma, Andy B and Phil – are you listening?
1. Compare the meerkat?
Workplace pensions should learn from price comparison sites how to get the mass market to take collective action. When BGL (owners of Compare the Market) wanted to incentivise people to use their site, they gave parents meerkats on completion of a transaction, BGL are now the second largest purchaser of toys in Britain (behind Macdonalds), the cost of these toys is tiny compared with the improvement in profitability. The main motivator for people buying insurance with CTM is pressure from kids – addicted to meerkat toys.
I don’t suppose that NEST will be giving away meerkats any time soon , but if they wanted to incentivise their members to transfer to them small pots from others, or incentivise members with small NEST pots – to transfer them away, it may be these kind of incentives that work better than enhanced transfer values.
2. Use popular routes to talk with members?
Yesterday, the Sun published an article about pensions that focussed on consolidation. I don’t know what the reading figures for it would be, but as it was a double paged spread, I suspect it will get more reads in a weekend than this blog will get in a years.
If NEST and Peoples and other mass- market providers want to talk to their members, they need to use the mass market press and find ways to their younger members hearts – other than newsprint! I don’t want to lecture on social media – I’m too old for that!
I’d also suggest that the mass market providers start talking with mass market comparison websites such as Compare the Market, Money Supermarket and Go Compare – even U-switch and Confused.
Where people are used to taking online decisions, there are established journeys in people’s heads that might work for pensions as well as for electricity supply or motor insurance.
For mass market solutions, we need mass market media and mass market transactional capabilities. Neither the pensions trade press or existing financial advisory services have the scope to perform mass -market migration of the type need for “pot follows member”.
3. Get digital?
Well I would say that wouldn’t I? It’s no secret that I want to create in AgeWage a means for ordinary people to compare what they’ve got (dashboard), point towards what they want (steering wheel) and consolidate (foot down on the throttle)!
I’m keen for people to do things but I don’t want them to do silly things. I don’t want them incurring big transfer penalties on legacy (see Pension Potty article), I don’t want people missing out on terminal bonuses and guarantees annuity rates, and I don’t want people ditching providers that could help them spend their pots wisely. So we need a responsible system of comparison.
But we can’t do a mass migration of assets – as would happen if pots did follow members without the help of digital technology. Infact the long-term solution looks likely to involve smart ledger technology (the notorious block chain). In the short-term, what is needed is an agreement between providers not to block transfers and to welcome small pots when they arrive at their door.
In this the Origo Exchange will be vital. The more use that is made of this fantastic invention the better. I urge those providers still to sign up to Origo – to do so. I will continue to promote the Pension Bee initiative to name and shame those who don’t (the Robin Hood Index).
Making it happen!
I suspect that much of what I’m talking about is actually happening and providers are talking about how to fulfil on pot follows member – without my interference.
But I’m embarking on a round of meetings over the next few weeks to see what appetite there is among workplace pension providers to pick up on my three tips
- Use of incentives
- Use of mass market integrators
- Use of digital technology.
I hope by Christmas, to be able to report good news- and I hope that there are a few more caring souls like David Veal – who get what we are about!
Good pension report in the Sun. There should be a website to compare pension costs and a calculator. Surprised some entrepreneur has not produced one
— David Veal (@DavidVeal12) September 9, 2018