There is an aspect of human nature that that tends to defer long term decision-making in the present, because it can be put off until the future. We are seeing this clearly in the behaviour of our members when they change employer, and an analysis of our in-house data reveals that 98 per cent of people that change jobs simply leave their old pension pot behind and start another pension at their next employer.
Frequent job changers are building up multiple pension pots across different providers, causing duplication of administration costs, leading to charges throughout the industry that are higher than they otherwise would be. It’s so wasteful – it’s like leaving the heating on your spare room for weeks on end while you’re not using it.
Last year NOW: Pensions sponsored two studies by Pension Policy Institute, which showed that by 2035 there will be 27 million small deferred pots and the un-necessary administrative duplication could be wasting £1/3 bn every year.
The challenge for the industry is to find a way to eliminate this waste without damaging all the good things that auto-enrolment have brought us. So we are keen to preserve AE’s system of “strong defaults”, which means for those in the workforce that don’t want to spend time thinking about pensions, there are trustees or IGC’s minding their back for them. And we need to keep employers with a central role in benefit provision, so that those that want to provide generous pensions as a distinctive feature of their workplace continue to do so, and those employers that are thinking of stepping up from the statutory minimum can do so knowing that it will reflect well on them as caring employers.
We’re sure that the best place for a current employee to be is in their employer’s workplace pension scheme. But we’re not so sure that’s still the case for former employees.
Amongst the solutions that the cross industry working group is looking at is the oddly named “default consolidator”. And it’s an option that we’d like more people in pensions to be aware of so that it can have a proper airing.
The concept is simple. Everybody will have their own consolidation vehicle. While they are employed, they and their employer will pay into their employer’s pension scheme, just as now. But when they leave work, rather than automatically becoming a deferred member of their former employer’s scheme, their accumulated pension pot is automatically transferred to their default consolidator.
The average worker now has 11 jobs over their career, so during this time their default consolidator will receive a succession of transfers every time they change jobs, gradually leading to a pretty meaty pension pot.
At the foundations of this idea lie automatic enrolment’s key principles of strong well governed defaults coupled with choices for those that are ready and keen to engage with the responsibility of pension choices.
All default consolidator vehicles will be authorised by The Pensions Regulator, in a similar way to which TPR today use authorisation for master trusts, CDC schemes and DB consolidators. The worker’s first employer will choose a default consolidator for them, much as they choose their workplace scheme for them today. But with the additional safeguard that the employer can’t make a poor choice as only the best schemes will have passed authorisation.
And in the same way that auto-enrolment allows individuals to take the controls through a series of opt-outs, the default consolidator provides choice too. At each job change, whilst the transfer of the now deferred pension will be automatic, it will only happen after the departing employee has been sent communications setting out their alternative options, such as remaining a deferred member or transferring to a retail product. Similarly, the default consolidator allocated to a worker by their first employer will remain their default consolidator until the member picks up the reins and chooses a different consolidator. At that point their existing pot and all future deferred pots will automatically transfer to their newly chosen default consolidator.
Over time, more and more people will engage as their default consolidator builds in size and becomes a meaningful part of their financial life. If they never choose, that doesn’t really matter as all consolidators will be strongly governed by trustees, so will always treat their members fairly and well.
But it would be great if they reach a point where they do want to think about choice, and to make it an active decision to stay where they are or to move elsewhere.
Probably only a minority will be able to afford advice, but financial advice will be good for those that can afford it. For the majority, MaPS should provide an education service, rather like PensionWise, that would explain the points of contention they should consider in deciding the best consolidator for them.
Both charges and risk adjusted past performance will be important parts of that choice, and need to be brought into focus at the time of decision. So consolidators should be part of “Open Pensions”, so that any of a number of regulated toolmakers can, with member permission, download the individual’s data from their consolidator and deliver an independent appraisal of how the consolidator has delivered so far for that member, and what future charges lie ahead for them under different routes.
We believe default consolidator is working with the grain of current government thinking. It reinforces everything that is good about auto-enrolment. It cuts out the wasted costs of multiple small pots, which will lead to better member outcomes. It encourages and allows members to become engaged when they feel ready to, with strong independent governance protecting those not yet ready for engagement. It will also lead to better choices at retirement by replacing multiple small pots with one large pot, as we are seeing overwhelming evidence from providers with more mature businesses than ours that whilst small pots just get cashed out at retirement, larger pots are much more likely to be used to provide a stable retirement income.
And that’s precisely why we get out of bed and come to work every day – we want to help people to build a comfortable lifelong income for their retirement years.