I was lucky to be invited to listen to Chris Curry yesterday at a DWP convened meeting to think about the issues around small pots. Much of the information discussed was proprietary to the DWP so I can’t share the detail but it’s clear that the DWP has got the data on small pots and is getting the message that this problem is not going to sort itself out through “member engagement”. It’s going to take some kind of automated solution dependent on moving money around so that people’s small pot(s) find their way into one big pot.
Sadly I couldn’t stay for the bulk of the meeting so missed a talk from Adrian Boulding and discussions with a wider group, including the Pensions Minister. But enough was said to make me feel that 2021 is going to be a year when this problem will be addressed and dealt with. It may take longer for the tide of proliferating pots to recede, but this looks like an issue that the DWP have got to in time, and one that they are dealing with, in a sensible way.
So what if you found your pot on the move?
We are all used to those letters from our financial services providers, banks- credit card companies – even our mortgages. They bring us the “good news”, that the management of our financial affairs which was in the hands of x will in future be in the hands of y and usually include an encomium from the CEOs of x and y that this will be hugely beneficial to all parties.
These letters usually go straight in the bin. But where the issue involves me taking a decision, for instance whether to object to change, I often find myself looking again. If I have the right to keep my affairs as they were and not allow them to move to a new regime, I generally stop to think and on occasion dig my heels in, the right to opt-out of change is welcome and appreciated.
This sounds (and is) illogical. Like , I suspect, most people – if I have no choice in the matter I roll-over, but if I have the chance to opt-out, I engage. This is how it is with auto-enrolment, many people did engage over whether they went in – precisely because they had the option not to.
When it comes to pot consolidation, whatever way the Government chooses to get it done, the principal established in auto-enrolment of the option to opt-out should be maintained. There are two good reasons for this.
- It shows respect to those whose money this is. Whatever the small pot bar is set at – whether £100, £1000 or £10,000, the sums involved will be meaningful. You do not leave 5 twenty pound notes lying around for others to pick up. The smaller the net worth of the saver, the more meaningful the small pot. Those who earn £500,000 pa may feel £500 inconsequential , but if you are on universal credit, £500 is a lot of money.
- It recognizes that for some people, having skin in the game with one provider or other, is important to them. My small pot with Nest is my participation in this great enterprise, I have a right to that small pot, even if Nest may find me uneconomic (I have no reason to suppose Nest want to kick me out -BTW). Nest (for instance) has 99% of savers in its default – but 1% of its 10m savers -that’s 100,000 people – have chose their own fund – some of those 100,000 have a stranded small pot – they took the trouble to make decisions about that pot and they should have the right to have those decisions respected
The respect shown to individuals to have the right to self-determination also provides an important safety valve.
It is a racing certainty that in small pot consolidation, there will be winners and losers. Not all pension providers provide the same value for money, nor will they in future.
It is impossible to tell whether £1000 invested today in the L&G master trust default will be worth more than in NOW pensions or the default of Cushon (who they -ed?). But you may find that you are being consolidated into Cushon (a recently renamed master-trust vigorously authorised by TPR) instead of sitting in L&G’s trust.
Let’s say that things go well for L&G and badly for Cushon, your consolidation ends up badly for you and you had no say in the matter – wouldn’t you feel cheated. For the good folks at Cushon, I should add that the consolidation could work the other way and L&G might turn out to be the dog fund in 2040 (or whenever).
So my input to the discussion is this…
- Small pot consolidation cannot rely on member engagement (even with a dashboard).
- Small pot consolidation will need to be automated and rely on a systematic rules based approach (with rules about pot size, who is consolidated to etc.)
- Most people will nod through the consolidation without a second thought – but they must be told it’s happening
- People will feel more respected if there is an opt-out
- Opt-out rates will be low but those who do opt-out will be those with conviction – most likely to care.
- Without the opt-out , small pot consolidation has no safety valve and could leave Government with problems down the line if a provider falls short.
I have proposed a “master pot” solution for small pot consolidation and am urging Government to consider it. You can read about what a master pot would like here. There are other automated solutions such as member exchange and they also have merit. But every automated solution must remember to tread softly, for the money in those pots, is other people’s money. Tread softly, for you tread on their dreams.