Last week the DWP issued its call for evidence on small pots.  I’ve been thinking about a few issues that I think it rather glosses over.

If you are not sure what the small pots issue is then in summary there are millions and millions of pensions pots under a thousand pounds and the number is just getting bigger. Primarily because Automatic Enrolment means that people have a pension even when they only work for a company for a short period and many of them frankly don’t get paid much.  

It’s a problem because there are costs in running a pension policy that are the same if the customer has £100 or £100,000 in a pension.  These include providing annual statements, dealing with change of address, finding lost members etc.  This means that a lot of pensions schemes are not really cost effective.  If we could find a way to merge these multiple small pots into one wee bit bigger pot then a lot of money can be saved, and who knows maybe passed on to the customer?  

So my thoughts on the consultation:

What about the cost of the solutions?

Whilst the two main solutions of default consolidator vs pot follows member are discussed there seems to be no intent to work out which will be easier and therefore cheaper to implement and run.   This seems rather odd given the whole point is to reduce cost to the industry?  

In fact I worry that the costs of the solution may be such that there is not actually that much of an improvement in the efficiency of running workplace pensions.  

Which brings us to…

That’s an awful lot of transfers!

A goodly amount of pensions transfers happen every year.  ORIGO, the dominant player in pensions transfers, manage over a million a year through their Options service.  Remember a lot of that is in the individual market with SIPPs, PPs, drawdown and generally for much bigger pots. 

Now add small pots with whatever flavour of automatic transfers we finally decide on.  We could be talking a 200% increase or more in the number of transfers a year.  Most of which will be for some pretty small amounts of money.

The reason this is an issue is that the admin involved in a £100,000 transfer is pretty much identical to that in a £100.  And here is the dirty secret a lot of it is manual.  There are teams of people in all the big pensions providers whose sole job is processing transfers in or out.  Funnily enough firms don’t tend to prioritise investment in the money out departments so there is little automation.  

Don’t get me wrong, ORIGO, ALTUS et al have really helped speed up and simplify the communication between the providers,  the problem is the internal processes inside the pensions firms themselves. 

I worry that if we don’t get serious as an industry about automation of transfers we may be about to break every pensions schemes back office administration.  Probably something the DWP want to think about. 

So, Ian,  which is the right solution?

I tend towards pot follows member but only if we can get the process slick enough.  If not I’d seriously think about staying with what we have now until it is slick enough.