Aggregation is the key

Michael Johnson describes why the DWP’s proposals for “pot follows member” are only a small step in the right direction

Automatic consolidation of pension pots and other retirement savings would help deliver economies of scale to the individual, leading to higher incomes in retirement, greater customer control over their own assets  and lower welfare costs, writes noted pensions expert Michael Jonson in Aggregation is the key: retirement saving nirvana for consumerspublished by the Centre for Policy Studies on Friday 13 September 2013.

Johnson accepts that the DWP is laudably taking steps to facilitate pot consolidation, but criticises its approach for lacking ambition. He 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’s 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 industry resistance. As he concludes:

“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.”

Michael Johnson - Friday, 13th September, 2013