Written by Ben Cocks on Thursday 6 August 2015
If consumers are to get good value from their pensions then the pension market desperately needs more effective competition. So it is encouraging to see some new providers entering the market, particularly in the platform and master trust arenas. Many of these new entrants have a business plan that relies on persuading their customers to transfer existing pensions from life office pension schemes. However, the widely recognised problems with pension transfers are thwarting their plans and stifling competition in the market.
Part of the problem is simply the process of transferring a pension. To transfer a pension from a life office the new pension provider must either try to persuade the customer to navigate a tortuously complicated and time consuming paper process (at which point the customer will usually give up) or sign up for a proprietary pension transfer service operated by Origo, a company owned by the life offices. For this, the new pension provider must seek permission from the life offices to join the service and pay fees that are not subject to any competitive pressure.
This could only happen in the UK pension industry. Can you imagine all the mobile network providers having to seek permission from Vodafone before transferring a customer’s phone number? Can you imagine all the energy suppliers having to pay a fee to Southern Electric for transferring a customer’s account? No, of course not. The regulator would come down on them like a ton of bricks.
A better approach is already available. TISA and the UKFMPG (the body that develops ISO-based open technical standards for UK financial services) have created an open transfers framework covering the technical and legal aspects of transfers. This allows multiple competing technology companies to offer compatible services and all participating companies an equal say in how the service operates. This has been highly successful in the ISA market and has led to a huge increase in the number of transfers and consequently the level of competition between ISA providers. But despite participating in the open transfers initiative for ISAs, Origo and the life offices have so far shunned open transfers for pensions.
At this stage it seems unlikely that the life offices would change their stance without a regulatory imperative. The DWP’s ‘Pot-Follows-Member’ is one possible answer. The DWP ran a commendably open and collaborative consultation on the implementation of the Automatic Transfers policy. It spotted this problem early in the process and very clearly mandated the use of open standards for automatic pension transfers. If PFM goes ahead then this could well be the catalyst that opens up the industry for all pension transfers.
But if PFM doesn’t go ahead then we’re back to square one. It’s possible the treasury could prompt some action as part of its current consultation. Unless pension money can move freely between providers then the new pension freedoms are unlikely to have the intended impact. Let’s hope the treasury is paying as much attention to the implementation detail as it is to the headline tax changes.
This article first appeared in Professional Pensions 06/08/2015