UK – The UK government should consider the use of a nationwide pension-pot clearinghouse over proposals to allow the automatic consolidation of small defined contribution (DC) pots as employees move between companies, a think tank has said.
In a report that criticises the Department for Work & Pensions’ (DWP) lack of ambition in implementing ‘pot follows member’ (PFM), Michael Johnson of the Centre for Policy Studies called for the £10,000 (€11,700) cap on automatic transfers to be scrapped.
The academic was critical of how the DWP arrived at its conclusion to limit the size of pot transfers, arguing that its modelling “penalises” aggregation.
“Essentially, it would seem to have been pre-ordained that PFM would enjoy a cost advantage over the aggregator model,” he said.
“But change the pre-conceptions and remove the restrictions, and the DWP’s analysis collapses, along with its conclusions.”
Johnson suggested that workers have a single aggregator fund assigned to them rather than have their pot transfer to the new employer’s appointed fund.
He said the DWP should look to the Dutch pot-tracking website Pensioenregister as a conceivable basis for a virtual aggregator.
Johnson also proposed the launch of a national clearing house – PensionsClear – which, once operational, could help with the transfer of pension pots, as well as provide custody services or ease the complete transfer of one occupational fund’s assets to a qualifying aggregator.
The not-for-profit company’s set-up costs could be financed directly by the industry or potentially through a levy imposed by the DWP – with participation mandatory if the industry fails to cooperate.
He warned that if vested interests in the industry continued resisting PFM, the outcome could be a more aggressive approach from the DWP.
“The failure of many in the industry to put customer interests first risks inviting state intervention well beyond [the National Employment Savings Trust], to protect both consumers’ interests and the interests of all taxpayers,” he said.
“It is they who field the consequences of an under-saving nation.”
The risk of under-saving could also be tackled through virtual aggregators, the report suggested, proposing a portal similar to that in place in the Netherlands.
The European Commission is in favour of a pan-European pension tracking system and earlier this year asked providers in the Netherlands, Finland and Denmark – which has run its national service, PensionsInfo, since 1999 – to explore how such a system might work.
Morten Nilsson, chief executive at Now Pensions, talked up the potential of the portal approach to improve consumer engagement.
“Whatever route is ultimately adopted, the costs to the industry both in terms of time and money are going to be significant, which is why it’s critical all transfer mechanics be thoroughly considered and assessed,” he said.
“A rushed solution could prove an extremely costly mistake, which would prove even more costly to undo.”