Small pot consolidation – Ockham’s Razor is out!

Keep it simple stupid

I suppose it is impossible to deliver any document to Government which is the output of the PLSA, ABI without it being 70 pages and late in delivery. The document that trundled over the line yesterday was called


and it is “only” 69 pages long and it was delivered almost to the proposed timescale of the summer of 2021. Nonetheless it is too long , too wordy and it is likely to deliver too late

From this diagram we can see that what is hoped for, the “implementation of mass-scale consolidation model” is dependent on

  1. the implementation of a low cost transfer process
  2. the finalization of Value for Money metrics
  3. legislation

and that means not much happening before 2025 and “2025/6 and beyond” being the operative timescales. These timescales are long enough for the kind of industry wide model that the paper concerns itself with, to be of no practical interest to anyone till way after the delivery of the pensions dashboard. This initial report suggests that the pot consolidation model could make use of some aspects of the dashboard’s technology; this in turns suggests that in the minds of almost everyone , this is a blue-sky project

What is happening now?

The most interesting thing to come out of the paper is a pilot between NOW , Smart and People’s Pensions, who have decided to get on with what is called “member exchange” or – to use Adrian Boulding’s previous phrase “prisoner exchange”.

The idea is that members with the right kind of small pots are selected by the three providers and delivered through a bulk transfer to another master trust where these members have an existing pot. This is akin to the exchange of prisoners during the cold war which typically happened on a bridge at a border between east and west

There are a number of reasons this couldn’t happen anywhere else than mater trusts (the usual red flags) but the big reason is that contract based providers and employer occupational pension schemes have no real need to get on with matters in this brutal way.

But for Peoples, NOW and Smart, small pots are genuinely eating into their profitability and have the capacity to destabilize their finances.

You might be asking where Nest is in this, Nest is going to be an observer to this pilot. As usual , Nest has found a reason not to play nicely and this time the reason is comical. Apparently Nest’s rules allow it to take bulk transfers in but not to make bulk transfers out. In the parlance of the paper “Nest can push and not pull” and what we need is a push me pull you.

NOW Smart and People’s will be doing the prisoner exchange as a club of three, unless Dr Doolittle’s lawyers can amend Nest’s rules (which probably means laying something before parliament.

Legislation will be needed?

The impression I got from the DWP and in particular the Minister for Pensions was that the pensions industry should be able to sort out the small pots problem between themselves and certainly that’s what Smart, Now and People’s are doing.

However, for everyone else to play, the news for the Minister is not good. This paper tells him…

Legislative and regulatory compulsion requiring all providers with small pots identified as being in scope to take part in automatic transfers will also be needed.

Without it, we would have to rely on a voluntary club where automatic transfers would have to be much more considered leading to a much slower and more costly process. The costs involved in following the existing regulatory processes and ensuring no detriment is likely to make the transfer small pots unworkable regardless of the technology employed.

The “small club” may consider that the cost of delaying all this till 2025/6 and beyond is too high. If they use their option (as occupational schemes) to bulk transfer members without their consent, Smart, Now and People’s could be ridding themselves of imprisoned members with immediate effect and without the need for nosey parkers like the FCA getting involved or for recourse to legislation. This member exchange is the oven-ready solution that Guy Opperman was after and could result in a lot of people having rather bigger pots within months rather than years.

At which point, everyone throws up their arms and points out that NOW, Peoples and Smart may deliver very different results to members and that bulk transfers like the pilot are likely to produce winners and losers. Which is why a lot of the paper concerns itself with “value for money”. Actually, savers into Smart, Peoples and NOW’s default funds get considerably different outcomes for their money today. We are not supposed to see past performance as a guide to the future but people do. What can best be said is that all three workplace pensions are offering (according to AgeWage metrics), outcomes that are better than are being achieved by the average saver (including those in non-workplace pensions). A sensible “opt out” procedure is outlined in the paper

I support member exchange because it leads to a net gain (less admin costs, less levies, less pots to lose and bigger pots for people to get excited about). I also think that the member exchange works on the principal of Ockham’s Razor (e.g. it is the simplest way to explain and execute consolidation). It works for the providers who have lower costs per member without appreciably lower revenue and it works for the member.

The Chair of the working group, Andy Cheseldine, is also Chair of Smart’s Trustees and Adrian Boulding of NOW and Philip Brown of People’s also sit on the working group. Let’s hope that the pilot goes well and that it allows Ockham’s Razor to apply to the other solutions under consideration. These still include pot follows member and a version of what I have dubbed “master pot”

William of Ockham – a man who disliked plurality

Pluralitas non est ponenda sine necessitate“,

About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
This entry was posted in pensions and tagged , , , , . Bookmark the permalink.

2 Responses to Small pot consolidation – Ockham’s Razor is out!

  1. Eugen N says:

    Agree on this. Let’s get on and do it.

    As you can see nothing happens until providers realise this needs to make commercial sense.

  2. kate upcraft says:

    and can people lIke Hargreaves Lansdown not suggest, as they have today, that payroll can do this for the pension industry by letting employees save with any provider they like and those will solve things at a stroke. Just for once it would be nice if we didn’t have to do all the heavy lifting and the pension industry played nicely as you say Henry!!

Leave a Reply