A pension scheme consolidation wishlist

Alongside ‘megafunds’, the government is consulting on proposals to enable firms regulated by the Financial Conduct Authority (FCA) to transfer customers from one arrangement to another.

This is a sensible step, and not just to support the government’s consolidation agenda.

Already I’ve heard predictable claims that this change is either bad news for insurers, as it will force them to shift customers out of expensive products, or good news for insurers, as it allows them to shift customers into expensive products.

Both are off the mark – as well as being obviously contradictory.

Transfers for multiple purposes

The government’s proposal has a number of purposes, and of course needs the right safeguards to achieve it.

First, it is needed to consolidate small pots accrued through automatic enrolment.

Regardless of misgivings about the ‘multiple default consolidator’ solution, contracts will need to be overridden to enable transfers into a consolidator to happen automatically; just like trustees will need to be compelled to make transfers.

Since, in this case, the transfer is to fulfil a legislative requirement and will be received by a consolidator that is authorised for that purpose, it should not need extensive processes around it to determine that it is the right thing to do.

Second, it is needed for the government’s and FCA’s Value for Money proposals. The intention is that as a last resort for an underperforming scheme, a provider needs the ability to be able to transfer their customers out, again as an equivalent to regulations compelling trustees to do the same.

Hopefully this will not be needed, but if and when it is, it will be as a result of judgement by an independent governance committee (IGC) and regulator, rather than the provider.

The transfer will not need proof of why it should happen, but it will need rationale about why the destination is appropriate.

Third, the override is a way for firms to move customers safely out of a product, based on a judgment that they could be better off elsewhere.

This kind of transfer has happened under current rules, for example to transfer customers to a newer product, and to close down a legacy book. This will typically require extensive legal advice, involvement of the IGC and some ongoing risk for the provider.

If it involves a transfer from one insurance company to another, the firm may need to consult policyholders, the FCA and the Prudential Regulatory Authority, and get it approved by a judge, often with an independent expert’s assessment.

A more efficient process

A process that providers can follow, explicitly allowing transfers and setting out safeguards depending on the circumstances, will make it more efficient. It would also provide some consistency across different types of pension. Since 2018, there is a simpler process for ‘relevant money purchase rights’ without guarantees.

We raised the idea of a statutory override in 2014-15 in response to the FCA’s thematic review on the fair treatment of long-standing customers.

The FCA, at the time, was clear that there remained a risk of legal challenge from any customers who are put at a disadvantage as a result of the provider’s action.

It’s important to be honest that in the merge-a-thon we might be about to see, and in small pot consolidation, there could be winners and losers among scheme members.

For example, they could well transfer from a scheme that charges only a percentage-based management fee, to a scheme with a combination charge. It’s easy to do the maths and work out who would benefit and who would not, solely on the basis of charges.

Investment performance will inevitably differ between the old and new scheme – the policy goal is that consolidation will be more likely to improve performance, but that’s not a given.

Transfers from occupational schemes

We also need a change in the other direction: enabling transfers without consent from trust-based to contract-based schemes.

This is needed for a level-playing field for consolidation, not least to enable the guided retirement market solutions expected in the Pension Schemes Bill to fulfil its potential. Schemes will want to partner with providers, and many of the existing solutions lie in the FCA-regulated space.

We also need the ability to reassign from small occupational schemes to personal pensions.

Insurance companies have been left running many very small schemes where the trustees are no longer engaged: the employer has wound up, or the trustees have disappeared, but the provider has a scheme member at the end to help.

To resolve the situation, firms should have the ability to assign these as individual policies – effectively individual personal pensions – without being held to account for any past failures the trustees may have made.

This is as good an example as any of the benefit of consolidation over fragmentation and moving to a safer regulatory environment.

All of the above point to using different safeguards in the policy toolkit for different situations.

There will still be a place for the existing legal processes. The government’s consultation sets out a range of potential safeguards – respondents should review each on its merits, with an eye on consistent regulation and putting the need for good customer outcomes first.

Rob Yuille is head of long-term savings policy at the Association of British Insurers.