Yesterday (October 30th), the Government closed its consultation on improving member outcomes. It called for small workplace pensions to fold into bigger ones and by consolidating , deliver better outcomes for their members.
Pension consolidation is so politically correct it’s verging on “woke”. Why this headlong rush to bring pensions together?
We should start with the latest consultation from the DWP which focusses on the social advantages of investing in Britain’s infrastructure or what the woke call “patient capital”.
The trouble with housing estates, hospitals, motorways and bridges is that they cost a lot and are not the sort of thing that your average fund can purchase. But combine a few £100m schemes into a £1bn scheme and the £50m infrastructure project just became viable.
Which is why the Pension Minister’s calling for the trustees of defined contribution pension schemes worth less than £100m to prove they are worth the candle though a value for money assessment.
If they can’t pass muster on VFM, the trustees should find their way to their nearest billion-pound master trust, hand over the assets and wind up the trust.
The FCA are saying much the same to the Independent Governance Committees of the contract=based workplace pensions (what used to be called Group Personal Pensions).
Each employer’s workplace scheme needs to get its value assessed and the IGC’s, assuming VFM’s not in great supply, should suggest suitable alternatives (the FCA actually mention Nest and People’s Pension as alternatives.
Here the driver is improving saver outcomes (“bigger pension pots” to use everyday language). It’s thought that many insurers can’t cut the mustard compared with the multi-employer master trusts that have come to prominence under auto-enrolment.
AgeWage has been doing a variation on these assessments for some time and we have found that larger schemes tend to have consistent Value For Money scores around the benchmark of 50 while the scores for smaller schemes (to the left of the red line) show much greater variations in scores.
Our benchmark survey suggests that while some small schemes can offer exceptional value, some don’t and that the DWP are bang on, in their choice of £100m as the tide-mark.
Consolidation of small pots
Add to this an announcement in September that the Government is looking at ways to reduce “pot proliferation” as a result of people moving jobs and enrolling into several different workplace pensions without moving pension pots together.
Some master trusts are struggling to maintain small pots and pay a regulatory levy for each without putting up prices. Various options are being considered including the forcible consolidation of pots without member consent.
But consolidation isn’t just the buzzword for defined contribution workplace pensions. The DWP recently sanctioned a new kind of pension consolidator for defined benefit schemes.
These new “superfunds” will be able to swallow assets and liabilities of individual trusts and will compete with the insurers for “buy-outs”.
The DWP have gone so far as creating emergency regulations to get superfunds off the ground and the motivation here seems to be a fear that small schemes will not survive the ravages of the pandemic on smaller employer finances. Big is beautiful if you are the Pension Regulator.
Another motivator for consolidation is the general view that small schemes will not find it easy to participate in the soon to be delivered pension dashboard. “Soon to be delivered” – so long as the Government can focus on the big pension schemes that have the resource to get their data in order.
The Government’s fear is the long-tail of some 40,000 small pension schemes that – unless consolidated, will remain outside the dashboard’s perimeter.
All this without considering the needs of ordinary folk to have their pensions in one big pot (rather than lots of tiny pots). Individual pension consolidation is one of the things the pension dashboard is supposed to be facilitating, but the delays the dashboard is experiencing suggest that the “soon to be delivered” tag may arrive too late for hundreds of thousands of us who find we can access pension freedoms with little idea what to do.
The FCA have recently published data which suggests that the vast majority of us just cash in our pensions. The total number of plans fully withdrawn in 2019/20 remained steady at around 440,000 for the year with a value withdrawn of just under £5.7 billion. Well over half of the pots cashed out were smaller than £10,000. People only started using their pots to provide pensions when the pots were greater in size than £30,000.
Considering the purpose of incentivizing pension contributions though tax relief is to relieve poverty in later age, the use of pension pots to provide those in middle age with anything from Lamborghinis to caravans is an issue for Government and society.
Small wonder that the Government is introducing “investment pathways” to encourage savers to consider other options with small pots than simply to take the cash. The facts presented by the FCA suggest that the best way to get people thinking about “wage for life” solutions is to help people make pots bigger.
That means saving for longer and bringing pots together prior to spending what’s in them.
Consolidation is a long word and not often thought of in terms of individual savings. But perhaps in helping us to spend our pension savings that consolidation has the most important role to play for the consumer.
I have found a few very small pension schemes run by companies to be very efficient in terms of charges and performance, and also bad small schemes. There are many large pension schemes (Royal London, Standard Life etc) where the default fund is absolutely dreadful.
Even Nest’s default fund (2040 Target), at 46% over 5 years to 30 June 2020 is not impressive when a comparable benchmark did 56% over that period. For comparison, Standard Life’s default made JUST 18%. Yes, you heard correctly – 18% in five years to 30 June 2020 for SL Active Plus III
It’s very hard to get leverage with fund managers and there are plenty of fixed governance and administration costs that bear heavily on small schemes.