Pot consolidation doesn’t need alchemy

The case for Government intervention on “small pots” is made very well by Dirk Paterson

It is indeed time for Government intervention, but the choices are many and each has its issues. The danger of relying on Government intervention to solve a private sector problem is most obviously delay.  The politics of the pension dashboard risk not just delaying a public dashboard, but stifling the innovation that could solve the problem independently of Government involvement.

Here are the options , well laid out by the PPI in its paper

Policy options for tackling the growing number of deferred members with small pots

The PPI conclusion is that

“Policies aimed at consolidating pots are likely to provide a better long-term solution than tackling charging structures”

I quite agree, and say so in our response to the DWP’s call for evidence over the charge cap and restrictions on complex charging structures.

It’s worth asking whether there is precedent for speeding up the process through interim regulations and perhaps policy commentators and makers could look at how tPR has engineered space for superfunds by adapting the secondary legislation for master trust authorization.

Because if we are to wait for primary legislation to force through consolidation , we may get to the scenario Dirk outlines before the remedy is available. The vaccine needs to come from the private sector, supported by sympathetic  and aligned regulation.

The private sector’s part to play

The solutions outlined in the box above come at three levels of intervention

Minimum intervention

If we take politics out of dashboards, then we need no intervention for technological intervention to play a part in the solution. Organisations like Profile Pensions, Pension Bee, Zippen,  and AgeWage are testing solutions that improve consolidation through better pension finding , better safeguarding and better comparisons. As the Pensions Minister told me in July, delays in the dashboard should not be stifling innovation.

Similarly the provider consolidation pursued by Smart and other more acquisitive master trusts is benefiting from the lifting of requirements for actuarial equivalence (GN16) that dogged market consolidation in the past. The master trust authorization  framework encourages consolidation at scheme and platform provider level while the consolidation of insurers should mean over time , that relevant schemes can be combined under the same insurer,

There is much that can be achieved from open pensions independently of intervention. The only intervention needed right now is for Government to clarify this and remove amendments 52 and 63 of the Pension Schemes Bill at the Commons readings next month.

Medium intervention

Pot follows member and member exchange can both work on the principle of auto-enrollment, a nudge and an opt-out beating mandation.  If you find that your pot is stalking you and you don’t like your pot , you should be able to reset the consolidator. If you find yourself part of a member exchange and heading to a provider you don’t like, you have the right to opt-out and consolidate elsewhere. There are start-ups like Zygot encouraging technological solutions for member exchange and Government should be encouraging their innovation.

Here I  see regulation as an enabler and facilitator, not as mandating and i can see regulators finding ways for this to happen without waiting for another Pensions Bill (and all that entails)

Full market intervention

Creating Lifetime Providers and Default Consolidators are the kind of interventions that go down well in Australia but not in the UK. It’s not just the market distortion but the impact it has on personal empowerment. Let’s remind ourselves of a simple statement made recently by NEST

This is in the spirit of auto-enrollment. Making Nest or any other pension a default provider or requiring individuals to stick with a Lifetime Provider would not work for consumers or businesses for whom the option to choose remains central to a default culture.

Thoughts for Government

The Pensions Schemes Bill is taking an age, this is mainly down to the pandemic, but also due to differing philosophical positions adopted by the Lords and the Commons (this is not a party thing).

The Government is going to have to decide whether it supports innovation and the adoption of Open Pensions, or whether it puts protecting the consumer as its priority.

If it wants the private sector to sort things out, it needs little or no more legislation, it needs regulators to facilitate and encourage innovation and it needs an open door to the innovators.

If it wants to control the market then it should intervene and set out a new legislative agenda. Frankly, I would have expected this had the Labour party won the last election but I see there being little political appetite for mandated consolidation.

It strikes me Government is best off using its two pension regulators to work in alignment towards a pragmatic, non-legislative solution. It should be reaching out to the innovators and to an extent it is. I am pleased that AgeWage has made it to the FCA Sandbox and please to be helping a large test group tell us how easy or hard they find consolidating their pots.

AgeWage will be feeding back to the FCA and we will continue to respond to Government consultations. We will also work through the Pentech lobby established by FDATA.

This blog will continue to engage with these issues and I hope that worthy organisations such as the PPI will push forward that debate in its even-handed way.

This is about improving the value people get from their pension saving, and in that we should all be on the  same side.