Having spent two weeks off combining seeing Mötley Crüe and the Ashes and getting my knee looked at*, I return to discover that the Mansion House speech this year has dumped a load of consultations over the wall on pensions. Excellent, I genuinely like this stuff. Sort of…

As you will expect, I am concentrating on small pots and letting the rest of the industry work out how exactly pensions are going to make the UK competitive again. (Good luck with that by the way.)
I will, as is my wont, split my comments into parts. This first post will lay out a summary of what the DWP is actually proposing. Next, my own thoughts on the policy aspects of the proposal, with the last my thoughts on the practical issues still to be ground out before we get there.

A warning for you. There is no detail at this stage. There are many, many questions to answer before this thing is delivered

So it’s Multiple Consolidator
I must confess this took me by surprise, I was expecting “pot follows member”. But the DWP has come off the fence and picked the multiple consolidator model.

In simple terms this means that small pensions pots will be pushed into a small number of selected schemes to consolidate. People will be asked to choose which one of these chosen schemes they want their small pots of pensions savings to go to and then a process will ensure that their small pots go there.

More on the policy side of this in the nest post Today is how it is supposed to work at a high level.

What is considered a small pot?

Pretty simple criteria this:
● Under £1000 (including micro pots).
● More than 12 months of no premiums (with allowance for exemptions like maternity).
● In an AE scheme with charge capped default funds.
● No guarantees.

Now it’s not said in so many words but I take this to mean all DC schemes used for AE. So master trusts but also GPPs, SIPPS, etc.

I expect a lot of “what about…..?” questions to come about edge cases on this but the big picture is pensions firms running AE schemes will need to give away most of their deferred pots under a grand.

Choosing your consolidator (and what if you don’t?)

As it stands there is only the high level proposal that a person can choose their default consolidator from a small list of approved schemes. Yes, I have a bunch of questions on this too.

They will also have the right to opt out of consolidation. But more interesting at this stage are the two options being considered for what to do if people don’t choose a favourite consolidator.

Option A: pots are allocated at random amongst the chosen schemes on a proportionate basis. Possibly based on existing market share.
Option B: pots are allocated to whichever of the chosen schemes the customer already has a pot with, or the biggest one if there are more than one .

This is where I expect all the policy discussion will come and I will have my 2p on it in the next blog.

Who can be a consolidator?

Some schemes will be authorised as small pots consolidators.

The phrase “small number of schemes” is used constantly through the document. We are not talking the whole of the existing market. So maybe 5 or 6 schemes?

Most of the document seems to assume these will be master trust, although it is accepted there may be a case for contract based schemes to also be accepted. (I can hear my old Royal London colleagues already reminding everybody that not all big AE schemes are master trusts.)

Clearing house or central registry?

To make it all work there will need to be a process in order to map pots to the right end scheme. A couple of choices are laid out.

A clearing house will store a customer’s choice of default consolidator and make sure they end up there. This is the DWP’s preferred choice.

A central registry is some other thing linked to Pensions Dashboards which is not well defined but made more sense in the world of “pot follows member”

DWP think it should be a clearing house, it will be a clearing house . Nothing to see here.

The 4 step process

1. Schemes will identify which pots they have that meet the criteria (i.e. under 1K and deferred for a year). They then tell the customer that they are likely to be auto-consolidated and offer them the chance to opt out.
2. The Scheme then contact the clearing house to identify the customer’s chosen consolidation scheme. If they have one, go to step 4. If not, step 3.
3. If the customer has not bothered to decide which default consolidator they want then the clearing house will contact the customer and explain what will happen next. And, using whatever criteria they eventually choose, will assign the customer a consolidation location.
4. The clearing house tells the scheme were they must send the pot and it’s over to the existing pensions transfer process.

Lots of devil on the eventual detail on this but the clear point is that the clearing house will manage the process of deciding where peoples small pots end up.

Whats next?

As ever there is not a lot of detail. Certainly nothing even hinting at a proposed delivery date.   Probably twice shy after saying Dashboard would be live in 2019. 

What we do know is that there is likely to eventually be primary and secondary regulation. This will be needed to force schemes to give up their small pots but also to provide the framework for the DWP to deliver this. 

We also know that later in 2023 a new working group will be set up to start to answer all the thorny questions the consultation does not cover.  

And yes, as it happens, I rather fancy being on that working group. Somebody has to keep all these pensions policy people in the world of practicality 😉

For us, what’s next is a discussion of some of the policy questions that occur to me at this stage. Stay tuned.

* Motley Crue – Average, Cricket – amazing, Knee – I don’t need an operation.