Pot-follows-member agreements: Feasible or fantasy?

The introduction of auto-enrolment has delivered a dramatic boost to the overall level of savings in the UK, but frequent job-changing means that much of this is being managed in subscale, poor-value pots. In extreme cases, these savings can be forgotten – 1.6m lost pots are thought to be worth £20bn.

Legislation to ensure that members take pots with them when moving jobs was introduced by the coalition government, but was never enacted amid concerns including the high cost of transfers.

Keen to improve member value for money and commercial viability via consolidation, Now Pensions director of policy Adrian Boulding told Pensions Expert that the master trust is seeking to take matters into its own hands by striking agreements with competitors.

“The idea is that we would use the existing legislation for bulk transfer without consent, which allows the trustees of a master trust to move people without their consent to another master trust,” he said.

Under the plans, if trustees of both schemes could agree that members would be better served by consolidating their savings with their current employer’s provider, the transfer would be made, subject to an opt-out by the member.

Mr Boulding said Now Pensions has approached other providers to kick off talks, and suggested it will be particularly pertinent for those serving the lower-income auto-enrolment market.

While only Now confirmed discussions with competitors to Pensions Expert, a fintech startup called Zivot is building the infrastructure required to broker these transfers and reports interest from master trusts.

Transfers must improve member value

By bringing pots together and potentially moving to more advantageous charging structures, pots are less likely to be forgotten or eaten up by administration charges.

This is particularly important for members of Now Pensions. The average deferred pot size in the master trust is just £350, and transferring small pots on to another provider will prevent funds being eroded by its flat administration fee. Incoming consolidation and increased scale will see the charges members pay fall as a percentage figure.

While members could benefit from these changes, the practice will face several hurdles.

For one, the Pensions Regulator will keep a close eye on the value assessments used to either green-light or block a transfer.

A spokesperson for the watchdog said: “TPR will have oversight of such transfers as part of our supervision of master trusts. Examples of areas we may consider as part of supervision include a trustee board’s decision-making process around transfers, and any impact on a master trust’s business plan or systems and processes.”

Assessing the impact of consolidation on the overall value for money a member receives from their DC savings requires "a serious piece of cost analysis", according to Anna Copestake, partner at Arc Pensions Law. She says that while the industry is building consensus on principles of value, "my sense is that, particularly with the regulated master trust market, they would find some comfort from the regulator's views on what framework they should use".

"Authorisation itself is a regulatory thumbs-up in a lot of areas," Ms Copestake said. She said data sharing would probably be treated similarly to defined benefit schemes seeking bulk annuity quotes, helping trustees feel comfortable swapping member information.

Rosie Allott, founder of the Zivot solution, said a key decider when assessing transfers between similar master trusts will be the intrinsic value of consolidation and building scale.

But she echoed the call for an industry standard on value. Zivot's plans to help providers share data and carry out assessments, will be more efficient if algorithms do not have to grapple with different bilateral agreements between trustees.

"We don't want to be at all in the dangerous area of defining value for money," she added.

Admins see light at end of tunnel

Data has been a perennial problem for pension schemes across defined contribution and defined benefit, and member exchanges will require master trusts to securely share member data.

Transfers will then have to be carried out at low costs, swerving the ultimate pitfall of pot-follows-member under the coalition government. According to Mr Boulding, projections of around £50 transfer costs per pot meant the policy’s good intent to protect member value could not be realised.

However, administration experts said that technological advances should bring this objective back within reach.

“There are data issues in the DC arena but identification of members is not as great an issue due to less legacy and better engagement,” said John Reeve, director at Cosan Consulting.

He suggested that a national insurance number might be enough to identify members. However, he envisaged more headaches with knowing when a member has stopped contributing to a pot, along with commercial conflicts for providers.

Girish Menezes, head of administration services at Premier Pensions, said: “Master trusts cannot afford not to attempt pot-follows-member type services. The cost of administering micro pots can be more than the value of the pot many times over.”

Neutral service needed

Ultimately, the more sensitive issue may be ensuring co-operation and trust between competing providers.

Darren Philp, director of policy at Smart Pension, said the recently concluded authorisation of master trusts means logistical issues and concerns about sending members to another scheme will be lessened, but suggested that a clearing house for data may be necessary.

He pointed out that to identify members with pots at both master trusts, the schemes’ entire membership data would need to be shared, and could offer competitors a route to stealing business: “It would need an independent framework to make it work… you’re not just going to open up your member records,” Mr Philp said.

Despite this he welcomed the proposals, stressing that small pots are a problem for both members and providers. He called on the government to provide guidance on the matter.

“It has got to be solved,” Mr Philp added. “People say the dashboard will help, but when will the dashboard be here?”