There are misgivings among pension consultants regarding pension consolidators in the retail market. The most commonly cited concern is the potential for higher charges in any consolidated plan outside of the workplace pensions price cap. But the list of charges against the retail consolidators is long.
There are also worries regarding the risks of being out of the market during a period of high market turmoil.
Another common criticism is that a consolidated plan can involve a lower quality investment solution or set of investment options, though for some that is tied into their thinking about charges and value overall.
Financial advisers, including those who offer both individual and workplace advice, also say that some of those consolidating their pensions risk losing in-built benefits, guarantees and other options especially with older plans – the devil most definitely being in the detail in these cases.
This includes guaranteed annuity rates and in the case of some insurers guaranteed annual returns or a big return boost built into a with profits contract held to term for example.
Corporate advisers also raise the possibility that those with a mix of DB and DC plans or a hybrid scheme could lose some options, protections and freedom of action around the taking of tax-free cash.
One consultant pointed out that the number of people consolidating pensions means that by the law of averages, some members must be losing out on benefits. He noted that some schemes issue communications to members highlighting some of the pitfalls when members seek to consolidate. However, he suggests that when members begin the consolidation process, they may already be committed to the idea and are unlikely to be dissuaded regardless of the quality of communications.
Many consultants and advisers believe that the Pensions Regulator and FCA may need to set out a clearer regulatory framework especially before the launch of the dashboard drives even more consolidation.
Yet it would however be unfair to say that all corporate advisers give consolidators such a bad review arguing that, overall, the benefits outweigh the disadvantages.
Cavendish Ware associate director Roy McLoughlin says: “The advertising including television advertising about pension consolidation has seen many people seek out advice. I have been contacted several times, so I think it is mostly a case of ‘no publicity is bad publicity’. It gets lots of people thinking about their pensions. We are being helped by consolidators. There is absolutely no doubt.”
He added that consolidator’s processes should catch any GARs and other built-in guarantees. The bigger issue, which he has seen examples of, is that you can get to 38 years old and have six different workplace pensions which is far from optimal for pension planning.
He also noted the huge number of lost pensions and the fact that consolidators often offer consumers tools to help track them down.
Indeed, in October last year, the Pensions Policy Institute calculated that lost pension pots were worth a total of £26.6 billion, with almost three million pots not currently matched to their owner.
The issue is already an issue for some workplace providers, and when the dashboards are in place and open finance is more embedded in the fabric of the financial services ecosystem, transfer activity can surely only get greater. With around £500bn and rising of DC assets up for grabs and increasingly efficient plumbing helping it to move around, this is an issue that is not going to go away.
Some consultants are in what might be described as a middle camp.
One consultant who chose to remain anonymous told Corporate Adviser: “Consolidating DC pots is generally a good thing, making it easier for people to manage their pensions – particularly those close to retirement or considering drawdown. Pending a small pot solution, it may also help the small pots issue and help the overall efficiency of the pension market.
“People can generally consolidate into any of their DC pensions. However, there is definitely a risk that people choose providers with the slickest marketing rather than the best value solution.
“Consolidator onboarding processes generally catch high risk issues like GARs and penalties, but they are pretty silent on charges and the potential benefits of ongoing governance from master trust trustees or IGCs.”
“Retail consolidators typically have higher charges than workplace DC – sometimes significantly so. Importantly they have less robust governance – for example for the foreseeable future they won’t be subject to the proposed value for money that all workplace DC providers will be forced to implement.
“So consolidation is a good thing, but there is definitely a risk that people will end up paying higher charges for schemes with less oversight – with a potentially detrimental impact in the longer term on their retirement outcomes.”
Some in the market say they have structural concerns, and contrast governance on the workplace side with FCA regulations where the individual is relying on TCF and the consumer duty. In their view the former hasn’t proved adequate, and the latter is, of course, yet to be tested.
CanScot Solutions principal Robert Reid says: “I have seen a case where a person went from 30 basis points to much higher charges. But the problem is that with the ceding provider, I couldn’t find the 0.3 per cent anywhere in the documents. The thing you should be told is that not only are you getting your money looked after well, but you could be paying a lot more somewhere else. That should be a headline.
“In terms of the consolidators – when it comes down to being execution only, it should be cheaper. You are not taking any advice risk – they should maybe be coming in at 0.2 per cent.”
Reid also cites FCA guidance for advisers to consider workplace schemes, regulatory rules which came into being following the pension transfers debacle.
This is from the relevant section of the FCA finalised guidance around pension transfers published in 2021.
“Except in certain circumstances, you need to demonstrate why the scheme you are recommending is more suitable than the default arrangement in a WPS available to the client. This may be in a scheme where the client is a deferred member.”
Reid says: “If you are going to have a view as a regulator that advisers have to give due consideration to workplace schemes – as a rule of thumb, consolidators should say ‘you have to look at this’. Maybe even to have a push back point as with DB where you start with a premise that this isn’t going to be a good idea. So perhaps all consolidators should have to say: ‘have you checked out your workplace scheme?’
Corporate Adviser did approach both regulators for comment. TPR suggested that the issue fell mostly at the door of the FCA.
The FCA drew our attention to the recent joint consultation on value for money with DWP and TPR. It says: “While starting with default arrangements of workplace pensions, our intention is to extend the framework more widely. We propose to consider extending the framework to cover self-select options, non-workplace pensions and DC pensions in decumulation in phase 2.”
It also noted the foreword to the consultation – “It is clear that value for money is not just about costs and charges. These proposals will help ensure that schemes deliver against value for money in the round. Transparent and consistent disclosure of the key elements of value for money will better identify underperforming schemes.”
Given its high-profile among consolidators we also approached Pensions Bee for comment. The firm responded by adding some criticisms of its own.
It noted first that according to TPR, “while costs are important, too much emphasis on cost can be detrimental to savers. The VFM framework aims to shift the focus from cost by considering other factors that feed into overall VFM and are important for long-term outcomes. This will enable a more holistic and informed view of the value that pension schemes provide.”
It pointed out that the three aspects of value for money within the framework are: investment performance; costs and charges; and quality of services
It added: “At PensionBee we ensure we offer excellent value for money on the basis of the following:
“Investment performance: market-consistent performance, by offering plans that are predominantly passive, global and aligned with UK pension asset allocation more broadly
“Costs and charges: cost competitiveness, with an all-in fee across our products of 0.63 per cent, which is well below the charge cap on default funds of 0.75 per cent.
“It also noted that the charge cap does not apply to PensionBee, but it is an important benchmark in pensions generally.
“Quality of services: excellent ratings across Trustpilot and app stores (> 4.5* ratings); call pick up times in <2 minutes; live chat waiting times of < 30 seconds; core transactions completed rapidly, including contribution setup in under 60 seconds and stress-free withdrawals.”
The spokesperson added: “Quality of service is particularly important when the UK relies on consumers to ensure they are adequately provided for in retirement, which means sound long-term planning and additional contributions (it is worth noting that PensionBee customers increased their contributions by 20 per cent between 2020 and 2022, from £507 to £628).
“We are concerned that some workplace pension schemes are offering poor value for money to their members on the basis of the regulator’s framework. We have heard worrying complaints from consumers that their pension provider is: not picking up the phone, slow to respond to requests and slow to process transactions.
“We would encourage workplace providers to offer information e.g. call pick-up times, transaction processing and average voluntary contributions that enables an appropriate comparison of the value consumers receive.”
It also has strong views on fees. “We would also encourage other providers to be very clear on their fees. We are transparent about the fact our fee is a single annual management fee, whereas other providers do not always disclose a full picture of fees.
“Specifically, employer subsidies, which have an impact on the employee’s overall compensation, are often hidden and undisclosed in workplace pensions. TPR is looking to tackle this issue in its consultation. We believe it is important to compare on a like-for-like basis, especially if employer subsidies act to reduce the current compensation of members, assuming all employee-related costs come from the same overall budget, as they usually do.
“To add to the fee confusion, financial advisers can sometimes charge high fees to consolidate pensions, ranging from 2-3 per cent. All costs and charges need to be clearly disclosed so savers can compare both price and service levels effectively when making decisions about their pension savings.”
They finally suggested that Pensions Bee is substantially more consumer-centric than any other providers that accept transfers.
Research carried out by Corporate Adviser last year found that a majority of intermediaries think consumers will prioritise ease of use over price, performance and functionality. If they are right, then the pressure is on workplace providers to ensure the consolidation journey to their scheme is as easy as that of the retail consolidators, and that the user experience is as engaging post-consolidation.