A month after Steve Webb announced that pot follows member would begin on an opt-in basis, the Department for Work and Pensions (DWP) has published its proposals for auto-transfers. The system will run under a number of caveats; most notably, that it will initially only apply to money purchase pensions in charge-capped default funds.
The DWP has proposed a two-step approach to implementation. The first phase will encompass only a sample of big providers, while the second will see the system become compulsory with scope for wider coverage too.
Through this transition communications will be tailored – from notifying members of their choice to transfer, to telling them their pot will be moved unless they object. There is a big emphasis on engagement. The DWP does not want to interfere where the member has clearly shown an interest in their pension.
The proposals are good news, according to Aegon regulatory strategy manager Kate Smith. She says: "The new system will see people's savings transferred between pensions of comparable charges, and the results will be that it's simpler for them to keep track of what they get and provide a complete picture of how ready they are for retirement.
"One of the major challenges people face today is that with savings scattered between different pensions, it can be hard to know how each fund is performing and what the total value of your savings is."
Towers Watson senior consultant David Robbins understands the department's dilemma in targeting the right people. He says: "Although they will have a right to opt out, you have a problem that if you automatically move people, you're potentially moving them from something better into something worse.
"Of course, there will be other cases where you're moving them from something worse to something better, but people tend to complain more loudly than they say thank you. I suppose DWP is just being cautious and saying ‘we just want to go for people who are behaving in a way that indicates they're not managing their own destiny and they're happy for things to be done to them automatically'."
A web of interoperable registers
Participating schemes will be required to develop their own register of dormant pots. This will be done in-house or with a third-party provider, with all registers expected to meet open standards and forming a wider network of "interoperable registers". The open standards will ensure there is a benchmark for how schemes hold, send and deal with data.
The paper states: "Where schemes identify that a member has left a scheme and has an eligible dormant pot, they will communicate information about this pot onto their chosen register. Schemes can choose whether to contract with a third-party register, or whether to build this capability themselves in-house.
"In either scenario it is important that these can then be matched to the member when they move to another scheme in the future."
Head of Altus Business Systems Ben Cocks welcomes the plans, but notes the demanding timescale set by DWP. It hopes to begin the first phase in the autumn. Cocks says: "We are wholly supportive of the decision from the DWP to embrace open standard pension transfers and believe this is a huge step forward for the industry and, more importantly, for the customers it serves.
"We have long been committed to the use of open standards and we have seen from other initiatives for ISA transfers and pension fund trading how their use drives innovation and competition between technology vendors, increased efficiency and reduced overheads for the industry, and ultimately a better service and lower costs for consumers."
Pots eligible for transfer will be worth £10,000 or less at the point of valuation, but this limit will be reviewed every five years. Contributions will have begun no earlier than July 2012 to coincide with the start of auto-enrolment. Robbins notes the rather modest scale of the proposals.
He says: "That's quite a long way from ‘operation big fat pot' that Steve Webb used to talk about. He's probably hoping to start with what's achievable and that it builds its own momentum, but you can already transfer a DC pot when you move to a new employer.
"The question is, what difference will it make when you get a notification from your new scheme saying ‘we've found you've got a pot somewhere else, would you like to move it across?' It's not clear what information will come with that. The DWP does not want it to be regulated advice, unsurprisingly, but useful enough to help you make a decision."
A Liberal Democrat, Webb has championed the pot follows member approach to auto-transfers. However, Labour has always favoured a centralised aggregator system over a federated structure. Hargreaves Lansdown's Tom McPhail is worried this split in opinion could mean any move to establish a system before the general election in May could see it repealed in the new parliament.
"I have concerns about the political risks of a change of government because Labour has repeatedly said it does not support this solution, meaning there is a risk that whatever gets set in train now could end up getting unwound if there is a change of government," he says.
Labour confirmed its position on auto-transfers to PP this week. A spokesman said: "We are given to understand that the mechanism contained in the last Pensions Bill will allow us to pursue aggregators. Pot follows member remains to be implemented for some time. Essentially it would involve a change of policy and approach rather than unwinding in our view."
As it stands, however, DWP looks dedicated to the current model. Robbins says: "There are various reasons why take up may be quite low during the opt-in phase, but I think if you ask DWP it would say it's completely committed to it." The department is currently considering the regulatory framework required for auto-transfers and will consult on this later in the year.
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