The recent publication of NEST’s 2018/19 annual report is a reminder of one of the big unresolved issues in workplace pensions – what to do about the swathes of small ‘stranded’ pension pots being created by the process of automatic enrolment.
NEST now has 7.9 million members but nearly half of these (3.8m) are ‘inactive’, mainly because they have changed jobs since they were enrolled into NEST. Given the average pot size across the entire NEST membership base is under £750, it seems likely that the typical ‘inactive’ pot is probably just a few hundred pounds.
The issue of large numbers of deferred members is a growing one for master trusts, group personal pensions and single-employer schemes alike. A lot of administrative cost is being spent on people who have no active relationship with the scheme or original employer. Similarly, for the member, having large numbers of trivial pension pots from previous jobs makes little sense and is unlikely to foster member engagement.
When the government decided not to press ahead with the ‘pot follows member’ proposal, it was left without a solution to this issue. The government’s latest position is that the dashboard will enable people to see what they have got and – presumably – to consolidate pensions if they wish. However, inertia is likely to mean most schemes will still end up with large numbers of uneconomic small pension pots.
In response to this, some schemes are looking to take advantage of new powers for bulk transfers without consent. For example, I have spoken to single employer schemes who are looking to periodically ‘push’ small stranded pots out to a master trust. While this is not necessarily a bad news story for members, it will be quite a communications challenge to explain to members that their pensions are too small for the scheme to bother with.
A more radical suggestion is to allow members to choose the scheme into which they were automatically enrolled. Under this ‘one pot to rule them all’ model, each employee could specify to their employer a single pension account into which all contributions would be paid.
On the face of it, this sounds attractive. Members would be engaged in making choices over where they want their pension pot to be, and individuals would end up with one pot.
However, there are a number of reasons to be sceptical.
The first is that those who are promoting the idea are not really interested in small pension pots. They are interested in getting into the workplace and harvesting the contributions of high earners and their employers. But if pension companies can cherry pick in this way, then the economics of workplace pensions are undermined. At present, workplace AE schemes often involve cross-subsidy between profitable higher paid employees and loss-making lower paid workers. Remove the top earners and the workplace scheme ceases to be viable. As a result, everyone else in the workplace probably ends up in NEST while the top earners end up with a self-invested personal pension on an investment platform.
It is also not clear how individuals would know which provider to choose. There would no doubt be a proliferation of advertising (all of which would add to pension costs) to try to persuade workers to choose a provider as their lifetime home, but how would workers know who was the best?
There is also an issue about pension engagement in the workplace in a world where everyone is a member of a different scheme. At present, with a single provider serving each workplace, there is much more scope for workplace-based engagement and enhancement of schemes with other benefits such as life cover. But if everything is completely fragmented, then workplace engagement will simply be uneconomic.
In my view, while the dashboard will be helpful, it does not really deal with the problem of fragmented pots, and some of the alternative solutions which have been proposed do not seem to have been designed with the consumer in mind. Maybe ‘pot follows member’ wasn’t such a bad idea after all.
Steve Webb is director of policy at Royal London