In the face of the current cost of living crisis, and the UK’s economic slowdown, it has never been more important to squeeze every last ounce of retirement income from the modest amounts that employers and their employees can afford to contribute to pension schemes.
Rather than simply clamouring for higher contributions to avoid a future pension crisis, we owe it to members to find greater efficiencies to ensure those contributions hit the bottom line.
So, it's good news that at the start of 2023 the government has again picked up the baton of looking after the pension pots of deferred members, with pensions minister Laura Trott launching a consultation on the narrowed down choices of either pot follows member or default consolidator as solutions at the end of January.
This is not an article about the ‘small pot problem'. It's about the opportunity to extract maximum value for money for the pensions of deferred members of workplace schemes! Back in 2010, the Department of Work & Pensions (DWP) published an analysis showing that the average UK worker has 11 different employers over the duration of their career.
I think it's a pretty simple piece of deduction from that figure, to realise that looking after the resulting deferred pensions well can make a vital difference to retirement income levels. To use the Pensions and Lifetime Savings Association (PLSA) lingo, it might even upgrade many would be retirees from a ‘minimum' Retirement Living Standard to a ‘moderate' standard, or even someone who was anticipating a moderate standard of living in retirement now expecting to fund a ‘comfortable' living standard in retirement.
One of the earliest pieces of work I did in pensions was a project with the Adam Smith Institute, and I still have in my study the memento bookmark they gave me, stamped with Adam Smith's salient reminder: "It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest."
Would we seriously consider leaving our deferred pension pots in the hands of a commercial consolidator, when the beneficiaries of those pots are so unaware of the challenges they face and so bereft of any sort of consumer power to balance against those that see them as just another source of profit?
Turning instead to look at employers, and it's immediately apparent that the country faces a severe shortage of both skilled and unskilled labour. This is forcing employers of all sizes to look at their whole remuneration packages, including workplace pensions. It doesn't matter whether they are a large employer burnishing their in-house scheme, or a small employer casting an eye at their group personal pension (GPP), they will all want to be able to reassure their workers that, as their employer, they are pushing for improvements and ensuring their retirement savings are well stewarded. I've seen it first hand, working with a master trust where large numbers of small employers turn out for the annual meeting, and at a GPP where small employers have successfully argued for charge reductions.
Unsurprisingly, once an employee leaves the job the employer's support wanes. The ex-employee has moved on and is no longer a valuable productive asset. They have instead become an overhead or overhang from previous times. And here-in lies the magic of the ‘pot follows member' concept.
By continuously moving the member's money on from previous employers to their current employer, we can ensure that throughout a career that spans perhaps many roles, their money remains in the hands of those who, at that particular time, have an altruistic reason to see that it is being managed well. The power of enlightened self-interest is at work. The contributions made by past employers, who perhaps no longer even exist, can piggy back on the current employer's desire to see their present staff well looked after - encouraging them to remain loyal.
Technology will be crucial to making this happen. It was the absence of technology that led to the original proposal for pot follows member (initially articulated in the Pensions Act 2014 but never implemented) failing.
However, we now have much of that technology now in place for the pensions dashboards. While the project has been delayed by the DWP, the first schemes have already been practicing with responding to test searches and data matches. In due course, they will be handling millions of searches for real, and promptly firing back an answer as to whether they hold a pension record for this person or not.
It will only amount to a minor adjustment of the computer code to change that search to look for an active workplace pension scheme for a dashboard user. That's the key piece of tech that will identify the destination scheme for the automatic transfer of deferred pension pots left behind by workers who have changed jobs.
It makes me smile that a problem that DWP has been wrestling with for over a decade will be resolved using technology built by the industry in response to a Treasury promise - the pensions dashboards - first made in George Osborne's March 2016 Budget, just a few years after pot follows member was first mooted.
Adrian Boulding is director of retirement strategy at Dunstan Thomas