Pension transfers: the case for ‘pot follows member’ continues to unravel
Regular readers will be familiar with the TUC’s opposition to ‘pot follows member’, the government’s proposed solution to the likely creation of millions of small pension pots once automatic enrolment is fully rolled out. Nigel Stanley first wrote about this on Touchstone in June, and the TUC joined forces with Age UK and Which? in July to raise concerns that, if pension pots automatically follow a worker from job to job, there is a significant risk of consumer detriment if their new employer’s pension scheme is worse than their old employer’s scheme.
Today brings a crucial developments in the campaign: the publication by DWP (at the request of the TUC) of additional modelling that enables a fairer comparison of pot follows member with our preferred approach, an ‘aggregator’ scheme.
The table below summarises some of the figures from the modelling. Alongside its response to the consultation on small pension pots, the government published in July an impact assessment which detailed the likely reduction in ‘dormant’ pension pots brought about by a system of automatic transfers, and based on this the likely cost savings for the pensions industry resulting from having to administer fewer dormant pots. Consolidation of dormant pots, and taking unnecessary costs out of the pensions industry, were the government’s key policy objectives.
Under a pot follows member approach, there would have been more than 30 million fewer dormant pots by 2050, taking around £1.25 billion of cost out of the industry, if the transfer limit was pot sizes of £20,000 or below.
But the original impact assessment did not include modelling of an aggregator approach with the same pot size limit. Instead the government argued that because of the risk of ‘market monopolisation’, an aggregator approach would have to have a much lower limit of £2,000. Under this system, if NEST was used as the aggregator, there would be only around 6.5 million fewer pots by 2050, with a saving of only £235 million (these figures actually quite similar to those for a pot follows member approach with a transfer limit of £2,000).
However, we now have modelling results for an aggregator approach with a transfer limit of £20,000, £10,000 and £5,000 (i.e. the limits aggregated only for pot follows member in the original impact assessment). The full release is available here. So we now know that an aggregator approach with a £20,000 limit (if NEST was the aggregator) would have results broadly similar to pot follows member: almost 25 million fewer dormant pots by 2050, with a saving of almost £1 billion.
Consolidation and savings to the industry are not quite as high as for pot follows member – but the risk of consumer detriment occurring in the transfer process will have been averted.
The government will argue that an aggregator approach with such a high transfer limit will cause significant market monopolisation as a single aggregator accumulates vast funds at the expense of existing private sector providers. This concern is not wholly unjustified, but overstates the extent to which the pensions industry operates as a ‘market’ in the first place. The immense and insurmountable asymmetries between consumers (both employees and employers) and providers means that the state must be prepared to play a decisive role in framing the market and making it work in the interests of consumers rather than industry. This is, after all, why NEST was introduced – and it is why we think the same body (or something similar) should be considered as part of the small pension pots solution.
Furthermore, market monopolisation could be mitigated by a system of multiple aggregators (Nigel’s post on this is here), perhaps arising out of the existing large multi-employer providers that have already emerged in advance of automatic enrolment. There would be an opportunity for providers to compete for transfer business while ensuring that the system produces both consolidation of dormant pots, and a significant degree of consumer protection.