In the version of the Titanic film commissioned by Joseph Goebbels, the ship’s crew includes a prescient first officer of German nationality, who warns several times of the dangers of icebergs, the inadequate number of lifeboats available and the excessive speed of the liner through the ice fields of the North Atlantic. He is ignored by the British hierarchy of the White Star Line, and as we know Titanic sank in less than three hours after hitting an iceberg.
I feel a bit like the pensions equivalent of that German first officer, as I have been warning for years that our industry will drown in a sea of small pension pots. I served on Alistair Darling’s Stakeholder Pensions Action Group in 2001, and alerted him to the danger of small pots, which could be cast adrift under Stakeholder with as little as £20 in them generating just 20 pence in annual charges. He accepted there would be a problem, but said he would leave it for his successors to solve.
In 2010 I had the honour of serving DWP again, this time on the Making Automatic Enrolment Work review. We recognised that auto-enrolment will generate a whole lot more small pots than Stakeholder ever did, and urged action on the Government. We expressed a vision that it should become the norm for people to move their pension pot with them as they move employer.
But unlike the Titanic, we will not be drowned by the sea of small pots in three hours. Everything moves slowly in pensions, and small pots are no exception. We can take measured actions over time to solve the problem, without rushing in and risking mayhem.
We face two major hurdles in moving towards the vision. Today’s consumer is pretty disengaged with their pension and is likely to become even more detached in an auto-enrolment world that positively harnesses inertia. And even when they do attempt a pension transfer, the process can be lengthy and complicated. The danger, which the government is right to address, is that if this situation is left unchecked then consumers will end up with many small pension pots and a far from optimal outcome to their pension saving.
But rather than rushing in and mandating auto-transfers of pension pots when people leave service, we could work our way towards the vision by amalgamating the best of the ideas that are being suggested.
A single aggregator could prove very attractive to pension schemes, especially those that will soon lose their ability to pay short service refunds
A single aggregator could prove very attractive to pension schemes, especially those that will soon lose their ability to pay short service refunds. But instead of creating an automatic or default transfer system, we should add this to the toolkit that the scheme’s trustees already possess. The trustees should have the power to transfer the pots of ex-employees to the aggregator when they are satisfied it is in members’ interests to do so. The trustees should be in control, and while they would probably move the bulk of small pots over to a government-approved aggregator, they would decide to retain those with valuable guarantees, those close to retirement and already de-risking, and for industry-wide schemes, those they hope will return to membership at a later date.
A “virtual solution” with all pension schemes wired up to a central hub that generates a combined annual pension statement offers real hope of overcoming both inertia and transfer difficulties. Not only could it alert members to the pots they have left behind in their wake, it could also identify which ones would be straightforward to transfer and which ones might suffer exit penalties if they were moved. Moreover, it could highlight pots being eroded by high administration charges levied after a so called “active member discount” has been withdrawn.
The virtual hub could act as a force for good, spurring members into action when it is in their interest to amalgamate their pensions together. Many players in the Sipp industry would welcome with open arms new customers wanting to transfer old benefits into a vehicle where investments can be actively managed.
My vision of a world where it is the norm for people to move their pension pot with them as they move employer remains undimmed. I just think we should take small steps to get there, and learn to walk before we try to run.