Those of you feeling befuddled by the Department for Work and Pensions’ (DWP) recent decision to go for a default multi-consolidator solution to small pots, with a Central Clearing House vs Pot Follows Member (PFM), might be forgiven for thinking that you’d fallen down Alice’s rabbit hole!
The DWP themselves confirmed that
“The pot follows member approach received more support from pension providers, across both contract-based and trust-based schemes”
i.e., those organisations who actually administer pension schemes on a daily basis.
There is also a strong belief in the industry that it’s the solution members are most likely to understand (L&G research). And when the DWP carried out a similar consultation in 2013, it concluded that PFM was the best solution, with primary legislation passed and a supporting paper published on how the industry could adopt the process, (“Automatic Transfers: A Framework for Consolidating Pension Saving”).
Yet, despite all this, the DWP has now opted for a Multi-Consolidator plus Central Clearing House solution; so, why?
The key, I believe, lies in Jeremy Hunt’s electioneering promise to boost UK pensions by £1,000 a year. To do so, it seems the DWP has calculated that it needs to create a few large, stable, accessible pools of capital that can be used to fund British long term illiquid projects.
To deliver this, there’s a clear strategy to reduce the list of Auto enrolment (AE) providers (by creating new qualifying criteria to be a Consolidator) and increase the size of funds, that can then be invested in the Government’s long term illiquid investment vehicle, as it appears that will become one way to meet the new performance criteria for Value for Money regulation.
We assume that PFM, whilst receiving a lot of support in consultation #1 response, won’t achieve this new strategy, so despite the enormous legal, technical and delivery hurdles, on the back of a stalled Pensions Dashboards project, this is what the Government is now proposing!
However, I must question whether any of this will see the light of day following the two by-election defeats. The Pensions Dashboards has already been proverbially ‘kicked down the road’, so the chances of the Multi-Consolidator solution making it to the starting gates, must be incredibly slim.
I therefore propose a new word to describe what we’re seeing ‘politicononimplementus’…a politically motivated decision that those making it, really have no expectation it will ever be implemented!
It will be interesting to see who is really prepared to fund the build costs, after the pensions industry already sunk millions into the Pensions Dashboards, despite the legislative imperative to do so. Aegon are rightly calling on the Government to clarify the order in which the plethora of initiatives will be implemented, but none have yet, at least publicly, asked how they’ll be paid for.
So, enjoy your summer, perhaps playing croquet at the Mad Hatter’s tea party with hedgehogs and flamingos doesn’t seem that bizarre after all!”
Whilst some (many? most?) in the pensions administration teams would have preferred PFM I’m sure workplace payroll departments and IT teams are breathing a sigh of relief.
The need to extend the payroll system to hold individual specific pension account details, the work to set up potentially as many unique payments as you have staff each month, and the ongoing work to maintain those fields and payments would be a nightmare which could only be compounded by the high staff turnover that is common nowadays and a significant cause of the small pots problem in the first place.