Written by Ben Cocks on Thursday 21 April 2016
With ‘Pot-Follows-Member’ now gathering dust on a shelf at the DWP, the latest darling of policy makers is ‘Scheme-Follows-Member’. The idea that an employee can choose the pension to which their employer contributions are paid is good in theory. It allows employees to maintain a single pension even when they frequently move jobs. It gives them choice over which provider to use regardless of what their employer thinks. And as a result of that choice it encourages competition between providers. Clearly it won’t be suitable for everyone. The unengaged people targeted by Auto-enrolment won’t want to make those choices and will still expect to be guided by their employer (and will still cause a proliferation of small pots). But in combination with other initiatives, Scheme-Follows-Member has its place.
One might even argue that Scheme-Follows-Member is necessary in the new pension landscape. Engaged pension savers would be well served by pension freedoms and Scheme-Follows-Member; unengaged employees would be nudged along by Auto-enrolment and some successor to Pot-Follows-Member for small pot aggregation; and a pension dashboard would help the unengaged to begin to engage. It’s almost as if this was all planned from the outset. Almost.
However, we mustn’t underestimate the operational headaches Scheme-Follows-Member would cause and we can’t expect employers to bear the brunt of the extra costs. Even the seemingly simple task of employer payroll processing for a single scheme today can be horribly inefficient and error prone. Employers can’t be expected to manage relationships with many providers and comply with a wide variety of processing requirements. A new clearing service would be needed to allow employers to submit contributions data just once and make one aggregated payment. That doesn’t mean we need a new centralised system that everyone must use. That didn’t work for the NHS and it won’t work for the pensions industry. But it’s not beyond our wit to agree common standards for a technical, operational and legal framework within which multiple technology suppliers can compete with interoperable systems.
And the employer would need some clarity on where their obligations end under Scheme-Follows-Member. What if the scheme charges are unfair or the available funds aren’t suitable? What if the provider’s administration service is chaotic and the contributions don’t get invested correctly? The employer must be sure that this will not be their responsibility.
Nevertheless, these are not insurmountable problems. The industry has come together to collaboratively solve this type of problem before and we can do so again.
Well, we might if there was a compelling reason to act. We have solved this type of problem before but rarely without a prompt from the regulator or the government. Whilst some providers will understandably be keen to have the opportunity to sell directly to employees, most employers have plenty of other more pressing concerns. And, in the aftermath of the abandoned Pot-Follows-Member policy, we’d all like some certainty that whatever wheel we put our shoulders to is here to stay.
For more information on the small pots proliferation problem Download Whitpaper
As first published in Money Marketing on 21/04/16