The IoD welcomes the opportunity to respond to this consultation document from the Department for Work and Pensions.
The Institute of Directors is pleased to have the opportunity to respond to this consultation. We recognise that small pension pots are already a major issue for employers, trustees, pension providers and scheme members. Sub scale, they are disproportionately expensive to administrate and can provide poor outcomes for consumers, in that they may be too small, on their own, to purchase an annuity and may be vulnerable to being consumed by charges. So, we agree that the issues of small pension pots and pension transfers (which can in themselves be problematic) need to be addressed. The proposed ban on short service refunds and the effects of automatic enrolment seem to us likely to make an existing problem much bigger.
We would not propose to answer the consultation questions in detail, but would have the following observations.
- We welcome the draft legislation to allow commutation of small pension pots under £2000 in value for personal pensions, creating as it does a level playing field with occupational schemes. This provision will go some way to helping resolve the “small pots” issue on its own.
- We note the evidence from Australia that “voluntary” action alone cannot resolve the issues here. We therefore think that more radical action is needed, whether that is by way of the “pot” following the member from job to job, through an “aggregator” scheme, or a combination of the two.
- In the case of the “pot”, by default, following the member, we wonder whether the Financial Services Authority might have a view on the suitability of moving from a low-charging scheme to a more expensive one? They have demonstrated high sensitivity in the past to “suitability” of pension transfer advice. We also suspect there could be issues around any movement from a Defined Benefit scheme (even to another such scheme), although Defined Contribution transfers will usually be easier, unless there are features such as guaranteed annuities in play. Different fund choices, or default funds, may make in-specie transfers impossible, involving cashing-out of the pension pot, with attendant out-of-market risk.
- The member should have the right at all times to “opt out” of any automated transfer process.
- We think that whatever solution is adopted, it should be available on a voluntary basis to existing small pots.
- We suspect that a single “aggregator” scheme would be preferable to multiple schemes. It will be difficult to make such an aggregator profitable given the nature of its function, and scale will be needed to drive down costs. However, we also think there are potential alternatives to simply using NEST and that there may be combinations of the “pot follows member” approach and the aggregator route which could work.
- Defining “small pots” is tricky, but the £2000 level seems sensible to us, given the trivial commutation limit referred to above. We think there should be no minimum level of “pot”, otherwise the problems we are seeking to address will never be resolved. An “upper limit” also seems sensible, although it is a matter of debate as to where that should be, and we can see arguments for having no upper limit at all.
- The pension transfer process itself will need considerable work to make it more efficient and simpler. Without this, whatever choice is implemented will simply result in more costs.
We suspect that there may be a number of technical and regulatory barriers, as well as commercial concerns, in the way of policy implementation here, irrespective of the choices made. It will take a determined effort to push through the changes required.