The government has revealed further detail on its long-awaited federated model for pension consolidation, as it moves to take the infrastructure development process to the next stage.
In a guidance document published last week, the Department for Work and Pensions outlined the framework for the consolidation of members’ defined contribution savings through automatic transfers.
Transfers will be facilitated through a network of “interoperable registers” that will hold information about all pots eligible for transfer rather than through a single centralised data point.
This decision follows extensive consultation with industry representatives, leading the DWP to select the federated model over a centralised register and a paper-based system, after concerns were raised about data storage and the risk of a single point of failure.
Marcus Fink, partner at law firm Ashurst, said while he thought the federated model was a step in the right direction, the success of the system would come down to the IT infrastructure put in place.
The DWP reasoned that a network model would maintain market competition and innovation: “Competitive forces should ensure they stay up to date over time. In contrast there were concerns that a single register… may not keep up to date with technological advances and industry innovation to the same extent.”
“It has to be made to work,” said Fink. “There needs to be a consistency of approach with a check and balance in place.”
Fink highlighted the additional costs to schemes involved in establishing a functional system. "Key providers will need to work with schemes to meet these costs,” he said.
All schemes that must automatically transfer pension pots will have to identify data of pots eligible to be transferred. Schemes will be able choose whether they develop a register infrastructure internally or contract with a third-party administrator.
The registers will be required to meet a defined set of open standards around how they hold, send and deal with data.
Howard Finnegan, sales and marketing director at Altus Consulting, said: “The open international standard has been very successful in both the Isa and investment worlds.”
These standards will be published to ensure it is clear what is required. Schemes will then be responsible for ensuring that the register they select is compliant.
In response, provider Now Pensions called for further safeguarding of quality by restricting the automatic transfer market to ‘licensed’ schemes. The roll out of PFM is planned to begin in October 2016 in a phased approach starting with the biggest providers.
Tom McPhail, head of pensions research at Hargreaves Lansdown, said he thought there was no certainty that the policy would survive the election and saw a number of issues with industry wide transfers.
“There are political risks, systems risks and risk of fraud. Once rolled out to every pension it becomes easy for fraudsters to insinuate themselves into the system,” he said.
