Bringing pension transfers into the 21st Century
Michael Klimes examines whether attempts to grease the wheels of pension transfers will succeed
- Transfers currently take a week on average
- Government wants pension transfers to be easier and quicker Better
- IT will help, but due diligence could impose a speed limit
The industry has recognised the need to simplify and speed up transfers for some time. Research carried out by Professional Pensions over the summer found that two thirds of pension trustees and professionals believe the current system is not good enough.
The main complaint is that there is no standard for members, administrators and trustees to rely on when dealing with transfers of pensions. Old technology, patchy regulation and the segmentation of the industry confuses all the parties involved.
Since the freedoms came in, Origo says from 6 April to 30 June 2015 some 120,000 pension transfers were carried out or are in progress with transfers taking an average of seven calendar days. This is one to one-and-a-half days longer than pre 6 April. There was an increase in pension to pension volumes of 22.3% in the three months since the pension freedoms rules took effect, compared to the same period in April 2014.
Transfers from contract-based pensions are fastest while trust-based schemes can take longer as there are more parties involved. With some surveys from providers suggesting the number of transfer requests will only increase, there is a need to get transfers right.
Better technology and cooperation are required. Origo is a not-for-profit operation set up by the big insurers to handle transfers. Managing director Paul Pettitt says: "The transfer process can be further enhanced and accelerated where the parties involved use a trusted service, which operates a community of providers, platforms, schemes and administrators."
In July the Treasury waded into the debate, publishing a consultation on Pension charges and early exit charges.
The aim is to make transfers easier and cheaper, regardless of whether money is in a defined benefit (DB) or a defined contribution (DC) plan. Department for Work and Pensions (DWP) has also had its say, laying out its plans to set pot follows member into motion in February.
But there are concerns the proposal, which was the brainchild of former pensions minister Steve Webb, could be running out of steam. But could the Treasury consultation give it some more impetus?
Closed shop
Altus Business Systems director Ben Cocks says the DWP's ideas on pot follows member could provide a comprehensive legal, technical and regulatory framework for transfers.
"If the Tresaury are not looking at what the DWP decided in pot follows member they are missing a trick," he says.
He argues the pensions industry could also learn something from the world of stocks and share ISAs. There the Tax Incentivised Savings Association (TISA) helped establish a framework for transfers involving ISAs which he says has worked well.
But Altus' competitor Origo currently handles around 95% of the contract market's transfers. Cocks argues this near monopoly is holding the industry back. "In one case it is a fair fight but in the other it is holding the industry back."
Cocks believes someone in government needs to take charge. "If neither the DWP or the Treasury does anything about this, it would be really upsetting," he says.
However, Irwin Mitchell head of pensions Martin Jenkins believes anyone pinning their hopes on this consultation will be disappointed. "It is going to be a real challenge for them to get an easier process for transfer. The life offices and funds out there have these historical exit charges. In some cases they are not so much exit charges as incentives to stay and continue contributing."
Jenkins thinks that, even if transfers could be simplified through legislation, there are further problems. He says few members are capable of making sound decisions in pension matters, and those that make poor choices will blame the industry.
Trustee dilemmas
A consultation which results in easier transfers for members would not necessarily be welcomed by trustees. "How much should pension trustees intervene in an area which is one they have avoided intervention in before, namely the members' right to choose to transfer?" asks Jenkins.
"Many trustees may feel a responsibility to provide safeguards here and that may end up clashing with legislation encouraging transferability," he continues.
Barnett Waddingham technical manager Brian Thorne says a technical fix can only go so far. He says: "We are spending a lot of time as a third-party administrator helping trustees meet their requirements for due diligence. With that in mind it is not clear how the process can be streamlined."
Whatever the Treasury decides at the end of its consultation, it is unlikely to come up with a quick fix.
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