Dan Mikulskis and Steve Webb have teamed up to write a paper aimed at people considering combining their pension pots. They are writing for the kind of sophisticated consumer who knows their way around pensions and is thinking of doing it themselves rather than handing the paperwork over to a financial adviser.
There are plenty of such people, I was one of them – they are interested in any support that they can get. I declare an interest, my firm works with a major consolidator on this problem and we face the challenge of encouraging people to simplify their retirement saving without self-harming.
As befits consultants, Dan and Steve set out to “give savers a balanced picture of the pros and cons of consolidation“. This is made clear in the paper’s title.
And the balanced approach is continued in the introduction
Five good reasons to consolidate DC pensions
• Potential to pay lower charges
• Rationalising your overall investment strategy
• Not missing out on innovations in investment approaches
• Better value when buying an annuity
• Easier to manage and engage with your pensions
Five reasons to be careful when consolidating DC Pensions
• Loss of Guaranteed Annuity Rates
• Loss of ‘small pot privileges’
• Loss of tax protections
• Risk of exit charges
• Lack of diversification (of provider / manager)
I don’t argue that these are the main issues that people combining their pension pots face. But put those ten bullets in front of anyone less skilled that Dan Mikulskis or Steve Webb, and the task of choosing a way forward has just got a lot harder.
The path to “consolidation” is already strewed with red flags. Dan and Steve may feel they are simply “consolidating the pros and cons”, but I doubt that. These two fellows are far too canny (and commercial) for that. What are they really up to?
A sense check for those using a dashboard?
Pension Dashboards are still two years away, it is clear that they will be used for transactional purposes when they arrived. People are going to have to screenshot or download their dashboard results and send the information to third parties rather than combine their pots with their dashboard provider. Despite this, Dan and Steve see a need at this point to provide a “sense check”.
a) Members will be able to see at a glance how many different pensions they have, including pensions from the pre automatic enrolment era, and may choose to investigate the potential for consolidation;
b) Pension dashboard providers, many of whom will have presumably invested large sums in setting up a dashboard, are likely to want to encourage workers to consolidate their various pensions, and to do so with the dashboard provider.
Although the dashboards themselves will not be ‘transactional’, there can be little doubt that dashboard providers who provide attractive and engaging dashboards will be well placed to have further conversations about consolidation and thereby harvest assets under management.
Here I need to challenge the conventional thinking that Dan and Steve are signing us up to. The thinking so far is that operating a dashboard will require substantial upfront investment and will be beyond the means of all but the providers themselves. This is not grounded in fact but in a prejudice based on an old world where data is owned by the large insurers and SIPP providers who own the “non-workplace pension” market.
But dashboards may not work like that. The data is owned by those who have the pots, they sign into the dashboard to release the data to the dashboard of their choosing and that dashboard then displays their data (including data on defined benefit and state pensions) using their best efforts.
Actually, the barriers to entry for pension dashboard providers are more likely to be regulatory than financial. Dashboard providers will be subject to the FCA’s new consumer duty and that means they are going to have to flag all the “cons” mentioned in Steve and Dan’s paper and more.
Above all else, dashboards are going to need to be unbiased and that means being independent of providers. It may be a lot easier for an independent data aggregator to be a regulated dashboard provider than a pension consolidator. Regulators have memories, they remember how insurers used their privileged position to drive annuity sales to them by inertia – a practice that became known as “seal clubbing”.
What is needed is not “seal clubbing” but information needed to make an informed choice.
This introduces a challenge which LCP (among others) are in a position to rise to. I suspect that this is very much in the forefront of Dan and Steve’s mind.
In order for people to make sense of the information they get on their dashboard, they are going to need a second level of information that tells them which of their pots and pensions are worth keeping , and which are worth combining into a “great big pot” (Steve’s previous phrase).
What’s already payable as pension , is not going anywhere near a pot without financial advice, so let’s put aside arguments about CETVs – and let’s take it as read that most state supported pensions are going to be paid as pensions with no CETV option.
What firms like LCP and the other pension super-brains, need to be doing right now, is working out how they can be useful to and commercially profit from pension dashboards.
I suggest that while LCP may not be angling to run a pension dashboard, it is thinking hard about how it can help pension comparison sites help people to organise their pots and pensions for later life.
How Dan and Steve can get involved in combining people’s pots.
Although dashboards aren’t transactional , they will be able to link to comparison sites that enable consumers to look at their pots in more detail, do their own value assessments and work out where they are best placed to get themselves what they want in later life.
These sites will either be independent of providers , or owned by them. LCP – like Barnett Waddingham, First Actuarial, Hymans Robertson, Isio and some of the larger non-actuarial consultancies, has the capability of providing consumers with a balanced and trusted view of what’s in their best interests to do.
Steve Webb, rightly, is trusted – he may lay claim to be the Martin Lewis of pensions right now!
The analysis provided by such large firms could become very valuable to comparison sites. These sites may well be run in time by the likes of Money Supermarket, Compare the Market and Go Compare – if there is a commercial point in them entering the pension comparison business.
But equally, it is possible that these secondary sites, offering regulated guidance on the relative merits of consolidators and value assessments on existing savings, will take a leap forward. My bet is that bright and agile fintechs will take the lead and will aim to be bought out when they’ve proved their concept.
For this to happen, there needs to be a recognised commercial model for these comparison sites to work to. For instance, there could be a formal or informal cap on the amount that can be taken in introductory fees (perhaps a percentage of assets transferred with a decency cap to ensure large pots don’t end up paying for small ones). This is how annuity broking currently works.
I would suggest that the Consumer Duty is to provide people comparing their pension pots, with clear guidance as to their options and absolute clarity about the commercial model that they operate. This is what happens in other comparison sites.
Right now, the FCA has not produced its paper on dashboard regulation and it may be that the secondary comparisons I am talking about are deemed to be outside the scope of the dashboard. But it seems impossible to me, to have dashboards without giving people the opportunity to look in more depth at how their pension pots compare and how transferrable they are.
This is an area of regulation which is really interesting, I suspect that pension consolidation will be at the top of everyone’s agenda over the next five years and Steve and Dan are setting their stall out early. They are guns for hire!
What are Dan and Steve really up to?
Dan and Steve aren’t authorised to give advice, they aren’t even regulated to give information and make introductions. They’re back-room boys with an eye to the main chance. There is nothing wrong in that!
They cannot fail to see the opportunity for their firm- LCP. It’s in providing dashboards (or more properly the comparison sites that they link to) with the support needed for them to operate.
People who have no appetite for full financial advice but want information to make informed choices are unlikely to look for that information from an Aviva or L&G, they will do what they do with motor insurance and other financial services and seek a trusted independent voice who will guide them to their best deal.
Because pension decisions are more complex and tend to be made once (rather than annually) , it is likely that pension consolidators will operate through intermediary sites (as well as punting for their business directly). It is to these new intermediary sites that LCP and their peers will be pitching – unless they aspire to enter the retail market themselves.