Almost as important as its findings, the constitution and delivery of the small schemes working group is an exciting foretaste of a new way of working for the DWP and its pension policy unit.  The 86 page report that was delivered to the public by the Pensions Minister this week is the distillation of experience of the past ten years of workplace pension development through a three month virtual alembic.

It’s a triumph of people getting things done by harnessing the new found collaborative technologies that the pandemic has forced us to use and what it means is that by June of next year we will be trialing a solution to one of the most difficult challenges to the long-term success of auto-enrolment. Unbelievably, this initiative was only laucnhed on September 22nd 2020.

Decisive and determined – “pot for life” gets the order of the boot.

A major calamity for payroll has been averted thanks to prompt and decisive action by the DWP’s small pot working group. Proposals put forward by Hargreaves Lansdown would have required payroll to pass contributions to each saver’s “pot for life”. This would be fine if the saver’s pot for life was the employer’s workplace pension, but for new joiners and for pension savers who fancied choosing their own pension, big problems loomed for payroll.

Those who have struggled to clear contributions to one pension provider will appreciate that the prospect of limitless interfaces would simply have been inoperable. My understanding is that the views of Samantha Mann of the CIPP, which chaired the implementation committee of the Working Group were crucial to the group’s decision to ditch the proposal. The Group’s report concluded

A lifetime provider solution would introduce a fundamental change in how workplace pensions operate and could result in losing the benefit of inertia, which AE has been built on, unless an approach was developed that did not rest on new employees having to provide existing pension details to new employers. In addition, it would also be complex and place an increased administration burden on employers and payroll as they would need to deal with paying contributions into multiple schemes.

Grasping the nettle

Small pots can breed nettles that sting

For year, small pots have grown like stinging nettles – dealing with them has been thought too painful . The best way to get to grips with nettles is grasp them firmly (it saves you getting stung and gives you full control).  This is  how this Working Group has gone about its task.

Happily,  the decision to ditch this payroll-breaking proposal did not put the kybosh on reform. the Pension Policy Institute have modelled how auto-enrolment proliferates small member pots meaning that by 2030 we might have 28m pots with less than £1,000 in them , the DWP have previously estimated that by 2050 there will be 50m abandoned pots.

There has been a school of thought that savers would get their act together and consolidate their pension pots -especially once the much-heralded dashboard arrives. However, the Working Group has determined that member action will not on its own be enough. So, to bring people’s small pension pots together, the Working Group is proposing that master trusts and other workplace pensions conspire to exchange members to the benefit of both the members and the schemes they join and leave.

This will be known as “member exchange ” and it will work like those exchanges of prisoners we used to see in the cold war. To use the prisoner exchange analogy, members will be lined up on either side of the bridge and at an agreed time, they will march past each other to their new homes.

While the concept is easy to grasp, there are some hurdles to leap before next summer when a pilot is due to be launched. Firstly, there needs to be a reliable member identification system to allow pots to be accurately allocated to members. Here there is an opportunity for workplace pensions to adopt in advance, the simple processes outlined in the find and view processes laid out by the Pension Dashboard Program.

There also has to be a universally recognised rationale for the selection of appropriate consolidation vehicles. Crucially, if public confidence is to be achieved, there must be robust safeguards against members losing out. There is not a risk of fraud here – we are dealing with internal processes that are subject to the controls put in place to meet the exacting standards of the master trust authorization process. The issue is one of member detriment, we cannot allow members to exchange a strong and well managed workplace pension for a pot that has slim chance of delivering good outcomes.

The Working Group have come up with a solution to this problem which focuses on the Government’s favorite measure

“In addition to looking at this in the context of trust-based schemes, consideration will also need to be given to contract based schemes concerning transfers without consent. Trustees / Independent Governance Committees (IGCs) would need a common Value for Money (VFM) assessment framework in order to enable pension pot exchanges without potentially creating unacceptable risk to the member or unacceptable burden on the Trustee/IGC”.

But member exchange only deals with the sins of the past

While member exchange has advantages in consolidating the already fragmented service histories of pension savers, it is not a forward-looking policy – it does not stop pots proliferating in future. Beyond the immediate remedy of member exchange, the Working Group is proposing what the pensions industry is calling a Master Pot.

The Master Pot collects small pots as they are left and is allocated to the saver either because it is run by the saver’s first provider or by means of some random selection called “the carousel”. It is proposed that savers would have an override so that they could deem the provider who would automatically pick up their small pots after them.

A paper well worth the reading

There is a lot more to the Small Pots Working Group paper than outlined here. There are good proposals on how multiple pots held by a single provider can be identified and brought together and there are excellent sections looking at (and rejecting) changes to opt-out options and the reintroduction of “vesting periods”. The paper is driven by consumer advantage but mindful of the needs of providers to offer sustainable value and employers to operate pensions. It is mindful of what can be done in the future and not constrained by what has not been done in the past.

It is quite extraordinary that the Working Group has delivered an 86 page paper covering so much ground in only three months. It is (by pension standards) a very good read and if you fancy following the arguments in more detail, you can do so using this link