Michael Johnson describes why the Government should pursue aggregation and introduce a “pensions dashboard” in next week’s Budget.
During the last Parliament, the automatic consolidation of pension pots and other sources of retirement income attracted much debate, with two different models proposed: “pot follows member” and aggregation. This prompted Michael Johnson to write Aggregation is the key: retirement saving nirvana for consumers published by the Centre for Policy Studies.
More recently, a “pension dashboard” has become a topic of increasing media interest: i.e. an aggregator. The terminology may have changed, but not the rationale: the Government should pursue aggregation and introduce a “pensions dashboard” in next week’s Budget.
Aggregation would enable people to access key information about their pensions and savings in one place, thereby delivering economies of scale to the individual. This would lead to higher incomes in retirement, greater customer control over their own assets and lower welfare costs.
While the DWP has taken some steps to facilitate pot consolidation, its approach lacks ambition. Johnson argues that aggregation, combined with a central clearing house and database, has the potential to achieve far more than pot follows member (PFM), both for consumers, and the industry (through significant cost savings). In the future, there could be as many as 50 million pension pots, making it all the more important that individuals can benefit from an efficient pension pot transfer mechanism (when people move jobs, they sometimes leave behind a pension pot with their last employer, often resulting in multiple small pots over their working lives).
It would also be popular: the DWP’s own survey found that 21% of respondents expressed a preference for PFM while 61% preferred an aggregator approach.
Physical aggregators offer many advantages. They can:
- pool today’s dormant pots with live pots (PFM only consolidates today’s live pots with future live pots: today’s dormant pots are completely ignored);
- pool all private sources of retirement income, including SIPPs, Stakeholder products, and even ISAs. PFM is irrelevant to the majority of adults, as only 12% of the private sector workforce (28% if the public sector is included) is participating in an occupational pension scheme. It also excludes the self-employed; and,
- offer a simpler communications network than PFM, as well as avoiding unnecessary transfer costs.
Johnson envisages that consumers should have online access to easy to use, secure, retirement savings information windows (“portals”) that, ultimately, display all their sources of retirement income. This should include their State Pension accrued rights as well as private provision. Annual charges and fees should also be disclosed, and the consumer’s portal should allow the user to project his expected weekly retirement income, based upon a user-determined retirement age and life expectancy.
Johnson accepts, however, that delivering such an important reform would be complex, and would have to overcome some industry resistance.
“Realising this vision requires ministerial determination, as well as overcoming a variety of challenges (notably the provision of accurate data). But none render the vision unattainable.”
The full report can be downloaded from here.
Date Added: Friday 11th March 2016
