Gog and Magog rocks – eroding slowly over time
New research from Steph Hawthorne on behalf of the FT’s Pension Expert shows that nothing has changed from the data published by the DWP (except Smart aren’t sharing data with the FT)
Steph’s 2022 data
Here is the DWP data, based on the ONS collecting information – to which Smart submitted data. The truly frightening chart, produced by the DWP is the one below. Why are so many pots below £100 in size?
The answer lies in the nature of work and of the auto-enrolment legislation. People with short term contracts find themselves enrolled into workplace pensions for one or two months and then left with a pot which they may know nothing about. This is particularly the case with migrant workers who may no longer be in the UK. They may have been Philippine crew of a British owned passenger ferry or fruit pickers or summer workers at a tourist spot. They are more likely to come from the gig-economy since the recent victory of the GMB which gives Uber drivers employment rights (including rights to a workplace pension).
Why’s this a problem?
Small pots corrode. They corrode the viability of auto-enrolment schemes such as Peoples , Now , Smart, Cushon and most of all Nest. Each pot has to pay for its own costs – the cost of communication , of data storage and of claim. Each pot has a levy to be paid on it to cover regulation, FOS, FSCS , TPR, FCA. In future, each pot will feature on the pension dashboard- an extra cost. Small pots don’t wash their face- they lose providers money, ultimately they could strangle a provider, leaving auto-enrolment schemes starved of development money, having to put up charges and ultimately having to close. This is the real threat – small pots are the bindweed of the AE pension system
Small pots erode. As Steph Hawthorne points out, small pots build up, not into big pots , but into multiple small pots. Cushon’s research suggests that over a third of savers with multiple pots had no idea that they could combine pots.
Smart people use the services of consolidators like Pension Bee who help combine small pots. But less financially smart people, find themselves at a loss.
These are likely to be the people who have least job security and the most pots, because they form part of the problem we have with financial exclusion. A great number of people in this country do not have the means to manage the financial tasks our pension system sets them.
So small pots are eroding their confidence in the pension system and small pots , where the costs of management are passed on in fixed fees, erode the pots. The Government has put a stop to pot erosion to extinction by limiting charges on pots under £100, but that is not a long-term solution. As all Steph’s correspondents say – we need a radical solution.
So what’s happening in the pension world to sort this mess out
The Pensions Minister has made it clear that the industry has to sort its mess out for itself. So the large master trusts have met and formed a small pots working group, which delivered a gSmall pension pots working group – GOV.UK (www.gov.uk). The report contained a number of radical solutions including Tom McPhail’s idea for an Australian hub and spoke system where payroll administered feeds to all the workplace pension providers and an idea which Adrian Boulding and I worked on , called “Master Pot”, where your record with the Government was marked with a provider to whom deferred pots would be automatically transferred , unless you chose otherwise.
As an interim step, the providers agreed to do what Adrian called “prisoner exchange” and swap small pots where there were obvious advantages to the member in this being done. The key was that pot swapping would have been done without member consent but with the option for members to stop it happening.
These ideas all have merit. A hub and spoke system makes sense as long as you have a limited number of AE providers, and this is happening- consolidation continues apace and we will be down to single digit numbers within a couple of years (says I). The Master Pot idea has merit if we can get a pension dashboard which shares information and if Government agrees to play a part.
But nearly 18 months on from the writing of that report, nothing has happened. Why not?
The answer is that like Gog and Magog, the giants have fallen out with each other. Nest has, not for the first time, taken its toys away and said it won’t play in “prisoner exchange”. The DWP don’t seem interested in working with HMRC in setting up a Master Pot arrangement and the CIPP and others aren’t too keen in having to run auto-enrolment for multiple providers (especially for smaller payrolls).
To make matters worse, the Treasury bungled the announcement of minimum retirement ages from 2027, meaning that some providers like People’s Pension will be able to release pots for drawdown earlier than others. This facility – known as a “protected retirement age”, gives schemes receiving lots of small pots at once an issue from “buddy pensions”, where all the buddy pots retain the rights from where they came. So no-one wants to play with People’s Pension, in case they have to run differing claims policies for different groups of members. Meanwhile People’s Pension can legitimately say that transfers away from its pension risk losing members rights they would have enjoyed if they stayed.
This is typical of the Pension Industry’s frail grasp of common sense. Like other complexities such as GMP equalisation, McCloud and split-charging, feeble providers are cowed by lawyers waving notices of potential class actions based on there being “member detriment”. These warnings stymie progress and the big win is once again lost in favour of not risking a small loss. This of course is the problem of handing problems to the pension industry, problems this blog has been warning the Pensions Minister about.
We see the same thing happening over the pension dashboard with the PLSA calling for extensions in delivery times for data from their members to the dashboard, to avoid “member detriment”. I am pleased that Tom has cast a cold-eye on this perfidious case of special pleading.
Because who knew Dashboards were coming? If only politicians had been talking about the launch of dashboards a few years ago, so pension schemes and providers could have taken a run up at this challenge, right?
— Tom McPhail (@PensionsMonkey) April 14, 2022
What of course is happening with delays with the dashboard, is that people with multiple pots, struggling to find those pots are putting off the combining of pots accelerating pot proliferation.
While lawyers and providers throw rocks at each other like Gog and Magog, corrosion and erosion continue. The Government doesn’t want to intervene but it may have no choice but to. That the biggest creator of small pots – Nest – is a DWP sponsored entity, makes its total failure to lead on this issue all the more shameful.
The big loser in these delays is the consumer. But the consumer is being cited as the reason delays are happening. As ever, small picture politics is getting in the way of big picture welfare. We can but weep at the ineptitude and lack of foresight of pension providers for whom all this is going to end badly.
Footnote
Thanks to Stephanie and Pensions Expert for help creating this blogpost.
