Pot follows member would have been the wrong decision for members and administrators alike, argues Margaret Snowdon
Pot Follows Member (PFM) was aimed at solving the problem of small, stranded pension pots, where members of pension schemes lose track of their benefits and fail to claim them when they reach retirement.
The PFM initiative was also influenced by the view that members with small pots had insufficient annuity buying power and transfers were taking too long to complete. It was, and remains, the wrong solution for real problems.
I recall being a lone voice, along with the National Association of Pension Funds, in opposing PFM from the outset. Now common sense is starting to prevail.
“However well-intentioned the proposition was, it was flawed”
The government was encouraged to feel that the perfect solution was to automatically transfer small pots to a new employer’s scheme whenever a member leaves service, making a big pot out of a number of consecutive small ones.
Sounds simple, but however well-intentioned the proposition was, it was flawed for a number of reasons, which government now realises. Automatic transfers create difficulties for everyone - employers, trustees, members and administrators.
The initial intention was to focus on auto-enrolment schemes, thereby, illogically, narrowing the field to the smallest of pots with the shortest history and ignoring the biggest problem – legacy DB and DC arrangements which are the most likely to go missing.
Further narrowing the field was the decision to focus only on larger schemes and introduce an opt-in where members choose whether or not to participate in the process. This meant introducing complexity as some schemes and some members would be in and others would not. A nightmare for members and administrators alike.
Employees change jobs between seven and 11 times in a lifetime, so that could mean a huge increase in the number of transfers from one employer’s scheme to another. This means an increase in the volume of administration to process the transfers, including due diligence to ensure the recipient is authorised (a particular concern in the face of pension scams), to collect the necessary paperwork and make the right payment to the right recipient while keeping the member informed.
Where the transfer is to a scheme less generous than the transferring one, or where there is no new employer, the system will be disjointed, needing greater communication with the member and adding to the administrative complexity.
Someone would have to pay for the work; either the transferring or receiving employer or the member through a charge on his fund. Assuming a transfer cost of around £100, this would be an impossible burden on schemes or members for a limited benefit.
The problems of locating old pension pots, creating buying power when you need it and speeding up transfers does not need automatic transfers. It needs better tracking of pensions generally, which could be solved by better record keeping by all schemes and a central database to track down member addresses when needed.
A central dashboard would be good, so that members could see all their savings in one place without having to move them around and could also help to increase interest in retirement saving through greater visibility, but such a sophisticated solution is expensive to develop and maintain.
Annuity buying power would be improved by the aggregation of pots at the point of retirement, although pension freedoms have made annuity purchase a bit less attractive for now. Embracing data and transfer standards would make transfers faster and cheaper and have a huge knock on effect on consistency and efficiency of other pension administration areas. None of it is rocket science.
Margaret Snowdon is chairman of the Pensions Administration Standards Association