I tend not to get as involved with the pure policy questions on pensions. That’s what Henry Tapper is for. I tend to concentrate on the mucky world of working out how to deliver the various options policy people come up with.  Sometimes perhaps suggesting that some “great ideas” are what we call “a nightmare to actually deliver”.

But I cannot help myself on small pots. Mainly as I’m still rather flabbergasted that they went with multiple consolidator. 

A bit of background. I sat on the previous working group on small pots on behalf of my old employer, Royal London. Frankly the Royal London position was so clearly that “pot follows member” was the only real option that it must have clouded my thinking.  Because the DWP have rejected that and gone with the idea that a select few schemes only will be the destination for small pots. 

I’m not going to go into whether I think this is right or wrong.  Mainly as the decision is made and I try to be pragmatic. What I will say is that I don’t sense that I am the only party to be surprised. Not least because I don’t believe the thinking on how to deliver multiple consolidator was as advanced as it was on pot follows member. That’s why I think the detail is so thin on the ground so far.

So what will multiple consolidator mean for the market?

The DWP are quite clear that they see this as a way to reduce the number of master trusts in the market.  I can see the attraction of this to a regulator.  They want to deal with a small number of large master trusts. But two things instantly occur to me.

Not all workplace AE schemes are master trusts.  Twenty five years working with GPPs makes this instinctive for me but it does feel like TPR are ignoring the contract based sector and its millions of customers.

Is big always better?  Small niche players are often able to provide a better service to their specific market segment than the one size fits all big boys.

In general though I cannot get away from the fact that this is a major market intervention cloaked as a solution to a technical issue. 

What is considered a small pot?

It’s always felt that whatever number you pick is going to be arbitrary.  £1000 is a pleasingly round number, as is 12 months. Lower than this I don’t think you fix the underlying issues. I might have gone higher but that’s me.

I also agree that all pots should be consolidated, including so called micro-pots. The alternative solution of refunds would be a nightmare to actually deliver and defeat the policy objective of AE.

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

I genuinely struggle here.  How will we actually pick our consolidation choice? Can the public really decide between People’s Pension, NEST or L&G?  Does it quickly just become an advertising spend game?  Remember that small pot holders tend to be the young, and the low paid.  So basically the least likely to be engaged. 

There is also another big question for me.  When will I make this decision? When I first enter the job market? How often will I be expected to review it?  What about the 12m who already have small pots? 

And the politest thing I can say about the two options for how to deal with people who will not choose is they both need “finessing”.  Option A (distribute based on market share) just bakes in market share, which does not seem right.  Option B (goes to whomever they have a pot with) assumes they already have a pot with one of the chosen firms .  

Who can be a consolidator?

I don’t see how we can get away from the point here that the DWP will be picking a small number of pensions schemes. Those chosen will have a pretty obvious competitive advantage. Not from the consolidated small pots so much as the inference that the government says they are better pensions schemes than those not picked. 

Also…

How will the rules be fudged to make sure NEST are one of the chosen schemes? 
Will there be a hard fixed number of schemes allowed?
If not, how will they stop dozens of schemes signing up?
Who decides?
What happens when a scheme no longer meets the criteria, or possibly decides to leave?

Clearing house or central registry?

It will be a clearing house. Maybe they should confirm the requirements a bit more before they decide the solution but such is the way of these things. Makes sense to me. 

The 4 step process

There is a lot of detail to work out in the process but by and large it seems sensible. A few thoughts are:

Why put in an opt out? It adds cost and delays the process. At under £1000, customer detriment is likely to be minimal and these customers already had the chance to opt out of AE altogether.

How often will firms be required to push members onto the consolidation schemes? Annually? On a rolling basis? Moving a few billion quid about on the same weekend across the industry seems like it will have a markets impact.

What’s next?

I am very keen to see if the DWP will learn the lessons of Pensions Dashboard when it comes to project governance. The industry needs to be more closely engaged, whilst ensuring that there is clear leadership and direction. 

The industry is not united on the small pots solution picked, so at some point the DWP will have to disappoint some people. However, I think it best to make firm decisions on the policy aspects one way or the other, so that the people who will be charged with delivering the IT, processes and procedures that will be needed are able to do so. 

Next up. How to go about doing this.