There is some very telling wording in the Department for Work and Pensions' latest consultation on “Ending the proliferation of small pots”.
The paper states that the proposed “small number of consolidators will be able to generate scale at a greater rate, opening opportunities to invest in productive finance, benefitting the wider economy”.
This factor appears to be the driving force behind the decision to select the consolidator model despite strong feedback that the pot follows member approach may be simpler for members to understand, given their deferred pension would follow them from employment to employment.
The desire to free up more money to invest in UK plc was not one of the five assessment criteria in January’s small pots consultation, which instead aimed to deliver:
- Net member benefits through improved value for money.
- Improved member engagement.
- A more competitive workplace pensions environment.
- Reduced administrative complexity.
- More confidence in the system for savers and taxpayers.
Proposed system introduces more complexity
In our consultation response, we argue that the proposals to introduce a clearing house or central registry brings more cost and complexity than is necessary and represents a significant investment in new infrastructure, with no firm plans yet as to who will pay for this.
In addition, the creation of a central infrastructure introduces a major cyber risk in creating a single source of data on members’ pension pots. One breach of this database, and member confidence is gone in a flash.
Remember, we have seen some very high-profile data breaches this year, including illegal access to member data from up to 300 pension schemes by Capita, 40mn electoral roll records from the government’s database, and personnel details for 10,000 police staff in Northern Ireland.
Proposals ignore the work done on pension dashboards
As Royal London’s director of policy and communications Jamie Jenkins points out, so much work has been done already designing a framework for pension dashboards.
This project has been delayed due to implementation complications, yet multi-consolidator in the proposed form introduces a system that is if anything more complex and uses none of the infrastructure.
We should focus on completing dashboards and look at which elements of the ecosystem we can re-use for tackling small pots.
The DWP appears disconnected from the industry in suggesting a system that ignores the opportunities dashboards will afford us.
Proposed system reduces competition
It could be argued that consolidating workplace pensions into a small number of large consolidator schemes will actually reduce competition in the market, by driving out smaller, nimbler players.
Adding this to the industry’s concerns that the multi-consolidator model is not the optimal policy to improve member engagement, and it is starting to look like the DWP has chosen its preferred policy based on a very narrow interpretation of value for money; namely:
- an assumption that an oligopoly of large commercial operators will always provide lower cost pensions and continue to innovate as they would in an open market; and
- that these schemes, better able to invest in illiquid assets, will always generate better returns than smaller schemes.
Not all bad
I do recognise there can be benefits to investment in illiquids. Not for nothing do some of the world’s largest overseas pension schemes – including the $460bn (£369bn) California Public Employees' Retirement System and the $575bn Canada Pension Plan – hold large tranches of global infrastructure.
Investments in utilities, airports and highways tend to provide steady, inflation-proofed returns regardless of the economic environment.
