Written by Jon Dean on Monday 17 December 2012
The first wave of large firms is out of the blocks with pension auto-enrolment, among these a number of retailers who typically have high turnover and numbers of transitional workers. Pensions Minister Steve Webb is already declaring the enterprise a success, though many think his announcement was premature given the vast majority of new scheme members will be at the small to micro-employer end. On the whole though, news reports suggest the public has responded positively to the idea of employers having to contribute to their retirement planning.
It probably helps that some of these larger companies have opted for more generous schemes than minimum compliance demands. Notable among these is Tesco. As Henry Tapper discussed recently in his blog on Tesco extra pensions, the company has retained its CARE scheme – unusual in these times when most employers are replacing DB plans with cheaper DC schemes that pass on the longevity risk to their staff.
Most other large retailers sit in the DC camp, albeit with varying rates of employer contributions, and by and large they are still “compliance-plus” schemes. This begs the question of what happens when short service employees in these and other low-charging schemes move jobs. Under the DWP’s small pots proposals these members’ funds would follow them into potentially less advantageous arrangements. Even though an opt-out clause is proposed, the transfers would necessarily be non-advised on cost grounds, and it has been a subject of much debate on how the industry can prevent another mis-selling scandal. The threat of class actions against providers for accepting transfers either out of pensions that include valuable guarantees or into high-charging or lower performing schemes is a concern for many in the industry. Steve Webb is clearly worried, threatening to name and shame providers whose auto-enrolment schemes are charging excessive fees – although he stopped short of defining how much is excessive.
Putting these issues to one side, one aspect of small pot transfers that we can more easily resolve is the cost of transfer. With some workers moving several times a year, deducting transfer costs from an already small fund could eat a sizeable proportion of investment returns, and quickly lead to disillusionment among the affected members come annual statement time. This makes it vital that small pot transfers are as cheap and automated as the industry can make them.
The ABI recently called on the Government to find up to £40m to fund development of a central information hub to facilitate transfers, with costs to be recouped out of levies. TISA’s work with SWIFT and the UK Funds Market Practice Group (UKFMPG) on stocks and shares ISA and funds re-registration, in conjunction with industry software suppliers including Altus, Origo and Calastone, proves that defining open standards for data transfer can encourage software vendors to create alternative, more agile and interoperable solutions.
UKFMPG has been working throughout 2012 to develop similar standards for pension transfers, removing the requirement to develop the centralised infrastructure which pension providers insist they would need but will not fund. Solutions based on open standards benefit the whole industry, allowing providers to choose the most appropriate technologies for them from a range of competing options, use them to complete transactions faster at much lower cost and ultimately pass on the savings to the scheme member.