The UK’s lack of a unique identifier number is draining resources of administrators and holding back the transferring and consolidation of pension pots, a report from the Pensions Policy Institute (PPI) has found.
The report says that while the UK has some numbers which could potentially be developed to become national identity numbers, at this point, the lack of such a number is an impediment to the easy transference and consolidation of pension pots.
The report points out that countries such as Australia, Chile, Mexico, New Zealand, Sweden and the USA all have a clearing house and/or central data platform to manage the flow of contributions. Ireland has one in development. The benefits of a central platform are that they reduce the administrative burden on employers, while also reducing the potential impact of employer error on the member. But the set-up costs and time it takes to set up a central platform are significant.
The report concludes that whatever of approach is adopted, pension providers are likely to have to make some adjustments in order to use a central platform.
It also suggests sharing the costs of adapting technology and the ongoing running costs between pension providers and Government will reduce the costs borne by members.
The Government is considering policy options to respond to the growing number of small, deferred member pension pots. As part of this process, the PPI was commissioned by the Master Trust Expert Panel, convened by the Department for Work and Pensions (DWP), to conduct an international study, exploring whether other countries have had similar challenges related to multiple pension accounts, and how these have been dealt with.
The report also found that many countries with a current national transfer and consolidation system, especially those with a lifetime provider model – Australia, Chile, Mexico, New Zealand – require pension providers to submit data in a standardised format.
Data standards allow a central system to easily collect data on individuals and pension schemes and to ensure that individual contributions are sent to the correct account and should also result in faster transfers. Data standards also make regulatory enforcement and assessment of tax compliance easier, the report says.
The PPI says default consolidators are a useful adjunct to a pot follows member or lifetime provider system, in order to pick up smaller pots which may not be covered. Pot follows member significantly reduces the number of small, deferred pots, however, pension providers will need to cover the transfer costs.
Dashboards complement existing policies, increase the availability of information to members, and reduce the likelihood of lost pots, says the PPI.
It adds that lifetime providers are an effective way of consolidating pots and reducing transfer costs and administrative fees borne by members, but also require significant infrastructure adjustments and may result in loss of business for some schemes which provide a competitive service to members.
Refunding small pots directly to members is likely to reduce future retirement incomes and predominantly impacts women, ethnic minorities and lower earners.
PPI head of policy research Daniela Silcock says: “Many countries, for example, Australia, Chile, Ireland, Mexico, New Zealand, Sweden and the USA, who have policies designed to minimise the financial downsides associated with small, deferred member pension pots have centralised aspects of their pension transfer and management systems through data standards, data platforms and clearing houses.
“Centralisation plays a crucial role in minimising harm from small pots because policies generally either involve pots needing to move from scheme to scheme – for example, pot follows member – or for employers to pay contributions to many different schemes on behalf of members – for example, lifetime provider. Once multiple pots or payments are being sent between schemes, a level of centralisation becomes necessary in order to avoid lengthy transfer times, significant resources being expended on identification and general administrative errors.
“While these systems are helpful, they are also expensive and take a long time to develop. However, the UK is on its way towards developing some aspects already via the pensions dashboard which will at least lay the groundwork for a national pensions data standard and could help with development of data platforms. The UK is particularly lucky in that so many other countries are already tackling the problem of small, deferred member pension pots, and can therefore provide valuable lessons regarding the potential benefits and pitfalls of pursuing different approaches.”