This is a tricky question for everyone and I will not give it full justice in a short piece, but let me explain the issue.

We know that the pensions market is dependent on inertia. The success of pension schemes relies on people not opting out. Much of it is compulsory, you have no choice whether you are in the state pension, there is no opt-out and much of workplace pensions relies on auto-enrolment and a variety of defaults on contributions , investments and (in future) on how your money gets paid back to you.

But importantly for pension advisers including actuaries and lawyers  is the right to do your own thing and exercise your capacity to spend your money as you like. This is what is meant as pension freedom and it has underlined thinking on accumulation for the last twelve years.

With CDC (or collective pensions as I’ll call it in this piece) the opportunity to opt-out is a little more tricky, you have to encash a right to a pension and return it to a pot of some kind. In this there is the question “am I getting a fair transfer value” , “who’s calculated it”, “how can I measure it’s Value for Money”. In short, it has the difficulty of DB transfers.

Which is why I suspect many transfers are going to have a lot of difficulty with people taking their DC pots and transferring them into CDC plans to get paid either immediately or (more likely) later, a CDC pension. That’s people choosing to take the transfer of their own volition. Trustees have to ask the questions in the previous question or have some assurance they will not be criticised or even sued for allowing the transfer to happen.

If sanctioning voluntary transfers is hard, how much harder may bulk transfers made without the consent of savers be? Here there needs to be strict protections of trustees and clear protections for members so that they understand what is happening. There are all kinds of problems for members who will find access to their cash restricted to the tax-free cash allowed (which will generally not be exactly 25% of the transfer value). Members will find the dashboard pension they see from their collective pension different from the pension estimated for their DC pension. It will be quoted going up by inflation and that’s against a level pension from DC. Actuaries tell me that up to a half of the value of the collective pension is in the increases.

In short, it is easy for a DC schemes’s trustee to argue that bulk transfers are just too hard and dig in the heels. This may not be possible without a lawyer explaining the reasoning but this could happen.

So what rights have employers to demand a bulk transfer happen? Well if they are sole sponsor of the DC plan, then they can exercise their right to wind it up and have the individual pots swapped for collective pensions. That will take time but it looks a last gasp measure. Much more easy, an opt-out for money to stay in the DC plan or transfer to another one if requested with a bulk transfer only for those who are driven by inertia.

There is another wrinkle here. What if the employer participates in a multi-employer DC (aka a mastertrust)? Some of these large schemes such as Nest and People’s Pension will not sectionalise the employer’s contributions and recognise any right on the employer to have “their staff’s money” as a bulk transfer. I suspect there are several others. Here I see there as being very little chance that trustees should allow bulk transfers to be paid for active members working for the requesting employer. I would see it even harder for trustees to justify an employer’s request to transfer the pots of those who have stopped contributing (deferred).

But there’s another deal made by master trusts where there are terms unique to that employer and usually rights given that a bulk transfer can be made to another scheme at the employer’s request. Here the question is whether “the other scheme” includes a collective pension” and this brings us back to the start of this piece.

TPR/DWP

I am seeing DWP and TPR this month. I’ll ask them. I think they could have 3 answers to demands for such consolidation  – yes, no and maybe!

1. Trustees have enough guidance to make their own decisions – maybe
2. Trustees don’t have enough yet and we’re looking to develop more guidance and even law to ensure consolidation happens when employer’s require it – yes
3. We don’t see why DC pots should be consolidated into CDC and will protect DC trustees (and maybe even DB scheme trustees) – no

I’d be interested in your views either by mail (henry@pensionsmutual.co.uk) or in the comments section of this blog.