The key to answering the question is to establish the value chain; to my mind there are two immediate winners from transferring a member’s pot.
- The ceding employer (the scheme the member is leaving)
- The receiving scheme (the scheme the member is joining)
The ceding employer is saying good bye to unwanted liabilities , the expectations of its staff that it will add value to its staff’s retirement planning. Transfer reduces both cost and future risk.
The receiving scheme is saying hello to some revenue generating assets under management from the transfer.
There is a third party to this – “the beneficiary” – aka member/saver/policyholder.
I see no good reason for the beneficiary picking up the tab when he/she had no choice as to the workplace pension he/she is leaving nor any say in the scheme he/she is transferring to. However, you can be pretty sure, that without proper protection from either tPR or FCA or both, the costs will fall firmly on the shoulders of the individual and in proportion to their holding in the scheme (ad valorem).
As one of the two obstacles to consolidation flagged by Smart Pension at a recent conference was the cost of wind-up, let’s ask ourselves for a comparator that we can all understand, the process of buying and selling a house. Here the costs of buying and selling are distributed between the purchaser and seller and do so based on some rules. These rules vary according to the jurisdiction (think Scotland and England), but the aim is for the split of costs to be equitable between those with skin in the game.
The problem of “who pays” has been picked up by the FT’s Jo Cumbo on twitter
Here’s the state of play at time of blogging, refresh the result by clicking the link
What seems clear is that much of the cost of taking on a scheme, falls to the new pension scheme. This is particularly the case if the quality of the data coming its way is poor. It is now possible to test data quality prior to the transaction and such a test could and should form part of the underwriting process.
Clearly , passing the cost of data clean up on to members through the AMC is not what should happen (though in practice it does). As part of a consolidation, the cost of data clean up should be passed to the employer on whose watch the data got messed up.
But what of wind up costs of the ceding scheme. Might it not be possible for these to be met by the new scheme just as the beneficiaries of a house sale may pick up the stamp duty or legal fees of the seller. This is part of the incentive to the employer to wind up and choose the new scheme and so long as the member remains the net beneficiary of the deal, is there a problem?
What then of the rare but important situations where an employer is subsidizing member costs by picking up fund or record keeping fees? It seems to me that in these cases it is rarely in the interests of members to be transferred to a commercial scheme, unless the subsidies can be transferred.
It might be possible to give member pots a one off enhancement (we used to call this a 100%+ enhancement of units) or the pain could be mitigated by an increase in contributions. If I were acting for members I would look for upfront compensation.
If we are moving to a world where the majority of the DWP’s 1200 schemes with assets under £100m are wound up after consolidation. It is important that there is clear guidance from the Pensions Regulator on what is best practice in this area. This cannot become a free for all where everyone wins but the saver.