small pots are rubbish

The Pensions Regulator has published its landscape of trust based Defined Contribution plans in the UK. It’s most easily viewed in this presentation.
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If you have flipped through the ten slides, you will have missed the most interesting statistic in the report, one picked out by Pensions Expert.]

“The number of deferred memberships has increased in the past year by a staggering 45 per cent to 7,523,000 (includes DC ), while active memberships have only risen by 24 per cent, according to TPR data published on Thursday”. @agewage2 – can you help? https://t.co/RriZvzyCVa1

— Pension Plowman (@henryhtapper) February 1, 2019

This is scary for a number of reasons.

1. Deferred small pots in occupational schemes can rarely receive future contributions. Even where people join the same master trust with two separate employers, it is usual for new contributions to go into new pots (People’s Pension tell me that they are now consolidating but for the most part pots proliferate!
2. Not only do pots proliferate but without new contributions , these pots can actually fall in value. For instance in NOW pensions, unless there is £18 of growth in the pot in a year, the charges will be reduce the pot value. There are many dwindling micro-pots.
3. The cost of maintaining small pots is unlikely to meet the revenue providers can generate from them and with the prospect of a claim on the pot in future, small pots are liabilities not assets to pension providers
4. With liabilities from small pots increasing at such a rate, the time horizons for break even for master trusts is pushed out further. Where admin bills are picked up by employers, those bills will rise, where members pay for their own admin, admin costs are unlikely to fall – they may well rise.
5. The vast majority of admin costs remain with the members of the scheme and are paid as a percentage of their pot. So those with big pots cross-subsidise those with small pots (except in schemes like NOW which have flat-rate admin fees which make small pots self-sufficient)

Pot proliferation must stop

We cannot continue to see pot proliferation continue at such a rate. The DWP estimate that by 2050 we will have 50m abandoned pots. That is an economic drain on occupational DC plans (and contract based plans as well).

What it will mean is that the costs and cross-subsidies mentioned above will continue to grow. For the not for profit master trusts, the capacity to bring down charges over time (the easiest way to distribute surpluses) will be diminished. Evolve Pension (Blue Sky as was) has it in its constitution that the AMC will be linked to the cost of running the scheme, if costs go up, then either the charge cap will be hit – and the scheme become unviable, or planned for decreases in costs will be shelved.

The master trusts are currently submitting their financial plans to tPR for scrutiny as part of the master trust authorisation process and no doubt these very conversations are occurring. The long-term viability of a master-trust is called into question, if there is no means of curbing pot proliferation.

What could stop pot proliferation?

One of the proposals put forward by Steve Webb and the coalition Government in 2015 was to initiate a system of “pot follows member”. This never got off the ground, squashed by the shelving of such ambitious projects by Ros Altmann a year later.

The idea of a “pot for life” is appealing both to providers and to consumers. The Australian system has adopted this approach in the workplace and employers can accommodate a variety of workplace pensions by signing up to a clearing hub run by outfits such as Super Choice.

But it looks highly unlikely that we will get pots following members in this way any time soon (despite lobbying for it by Hargreaves Lansdown).

What is more likely is that either through bulk transfer (where the individual gets no choice) or through incentivisation programs (where individuals are nudged into action), small pots will be transferred into big pots.

Bulk transfers

Currently, the amount moving out of occupational pensions by way of transfers (rather than claim) is very small.

The total amount transferred out of DC schemes to other workplace or personal pensions has increased by 22% in the past year, from £1.7 billion …. to £2.1 billion. This compares to the £36.8bn transferred out of occupational DB plans in 2017 (into various types of DC).

Despite attempts to loosen DC pots up, bulk transfers rarely happen. Most likely there is little appetite for receiving schemes to take on a lot of small pots that will never wash their face. Until a super efficient way of administering small pots is developed, it looks unlikely that trustees will be able to rid themselves of unprofitable pots, they are stuck with them.

Member incentivisation

In the absence of a developed market for small pots, the best hope is that ordinary people will decide to get on with pot consolidation for themselves.

There are a number of reasons why so little of this is going on at the moment including

1. The lack of an effective pension finder service (most of the £20bn lost pension money is in small pots)
2. Difficulties in taking transfers – it can take up to 100 days to get the money over (see recent blog).
3. Fear of giving advice. Even the blindingly obvious decision to merge two small pension pots comes under the FCA’s financial advice strictures.
4. Lack of awareness. There is simply no one talking to the general public about the advisability of having one big pot rather than lots of small pots.

Public awareness

Despite the scale of the problem, highlighted in TPR’s DC Trust paper, there seems very little concern – either in Westminster or the pensions industry about this problem.

The pension dashboard should (in time) address the issue of lost pensions but we are unlikely to see the pension finding service (however constituted) operating for three or four years.

Origo’s transfer hub has speeded up transfers among participants , but the majority of master trusts are still not on it (though NOW will be soon!). Single Occupational schemes are still operating transfer processes that are (to put it kindly) clunky.

The FCA are making encouraging noises to people who ask about consolidation, that services that provide the information about consolidation can do so with limited advisory permissions.

But we are still some way from getting pension pot consolidation onto the agenda of the likes of Martin Lewis. It is the lack of public awareness of the problems of small pots and of ways to consolidate them, that is most concerning.

A way forward

What I am pushing for, and hope AgeWage can make happen, is an increasing public awareness of the problems with pot proliferation. I would like to see clearing of pots between workplace pensions becoming cheaper , simpler and faster.

I would like people to compare their pension pots and make simple and intuitive decisions about who to consolidate to and who to take money from. I would like a new breed of pension administrators to bring product to the market that can take small pots and make money from them (within the cap).

I know I have in this wish, many who share the same views. I’d like to think that in this both the consumer and the providers on the same page.

To find a way forward, we need data, and that’s what the Pensions Regulator has given us. I thank them for their landscape of trust based pension plans. I’d like to see a landscape of contract based pension plans from the FCA and I’d like to produce a combined landscape of pension plans which explains how the two landscapes are in fact one.

But that’s the subject for another day!

Pots not pups – and not that kind of litter