Three steps to reduce the cost of pension consolidation

Government has now clearly set the direction of travel. The success of auto-enrolment – in terms of low opt-out rates – means even more small pots are going to be created than were expected.

Previous estimates that auto-enrolment would create around 370,000 new pots of less than £2,000 each year now look woefully low.

Faced with this deluge of tiny pensions and a clear consumer survey by the Association of British Insurers, the government has put the necessary legislative clauses into the pensions bill. 

In the future, when you leave work, your pension will automatically follow you to your new job. This will initially apply to all people in defined contribution pensions with less than £10,000 in their pot.

The challenge of making this happen is formidable, but achievable if all parts of the industry step up to the plate. Progress needs to be made in three areas.

Data integrity

More than ever before it will be crucial for pension schemes to be 100 per cent certain of the identity of their members. Records must be completely correct for name, national insurance number and date of birth.

This will begin with a duty on employers. Before reaching the point of auto-enrolment, employers must have authenticated their employee records.

To a degree, the real-time information requirements of the new income tax system have already delivered this.

But let us be clear, what is needed here is the certainty of accurate information to underpin an automated system that will move literally millions of cash transfers around the pensions system.

The alternative is unthinkable – for without complete certainty your pension could be moved away and given to somebody else.

Timely processing

The key steps all occur around the point of leaving one job and starting another.

So employers need to raise their game around notifying schemes that a member has left – and schemes in turn putting into action the leaver process.

The move to DC has already helped, and these things now occur with more urgency than when most pensions were defined benefit. That’s because DC works on daily dealing, and employers and schemes have learned that processing transactions late or unwinding contributions paid for someone that has already left service carries a real cost.

But employers need to move further, to a culture of doing pension things today rather than tomorrow.

Smarter use of technology

Inroads have already been made to reducing transfer times and costs, with initiatives like Origo’s Options software. But I estimate a transfer today still costs the industry an average of £50 to process.

I want to see that fall below £1. To get there, manual intervention must be removed from most transactions.

A central database that receives information from schemes about leavers, and is interrogated by the new scheme of a pension joiner, will identify that a pot-follows-member transfer needs to take place.

Upgraded transfer systems, either from provider Origo or from other interoperable software suppliers should process the transfers automatically.

Member communications must be upgraded to electronic form also. The idea of communicating via post to a pension scheme leaver is pretty slow and could lead to a dead end, as many job changers are also moving home.

It would be far better to communicate by email or text, as this is quicker and easier for people to give you their new email address or mobile number if it is changing.

In summary, there is work to do, and some attitudes to change – but the concept of your pension pot following automatically to a new employer is now not far off.

The long-term benefits of people having “one big fat pension pot”, as the minister likes to call it, will be greater consumer engagement, more informed decisions, greater buying power and better pension outcomes. All well worth striving for.

Adrian Boulding is pensions strategy director at Legal & General