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Pension consolidation: beware of giving up valuable rights

Plans to create a pensions clearing house are fraught with danger, warns Lorna Bourke.

Pension consolidation: beware of giving up valuable rights

The government has called on the pensions industry to come up with a solution to multiple pensions, but employees stand to lose out unless they can afford professional advice.

Multiple pension pots

Pensions are complicated. No two are the same, and during our working lives we often accumulate several schemes with different employers, making it easy to lose track of where the money has gone. 

Takeovers and mergers mean that many people lose track of pensions earned 20 or 30 years ago, so there is a sound case for consolidation. The government is concerned that the situation will get worse when auto-enrolment in the National Employment Savings Scheme (Nest) is introduced next year, because people may well accumulate dozens of pension entitlements from different employers. Pensions minister Steve Webb has called upon the industry to come up with a solution.

Against this background Standard Life and the Pru, both big pension providers, are discussing the creation of a pensions clearing house. It would be an 'execution-only' service that would allow investors to consolidate pensions when they switch employer or when rationalising pension savings. If the plan goes ahead, ‘Consolidate My Pension’ will be a free online service that will allow savers to switch their pension pots between providers.

‘The government wants the industry to come up with a solution to this problem of multiple pensions,’ explains Tom McPhail, head of pensions research at Hargreaves Lansdown. Nest could, of course, provide this service, but neither the government nor the pensions industry is keen for this to happen.

Navigating the pensions jungle

Consolidation is a good idea, and anything that simplifies pensions and reduces costs must be an improvement. But as the service is to be execution only, this implies that it will either be used by pension advisers on behalf of their clients, or by sophisticated individuals who know how to find their way through the pensions jungle.

Standard Life’s John Lawson admits that the consolidation platform would require every pension scheme provider to sign up, which is a mammoth task. ‘If we’re going to have a chance of having a system to amalgamate small pots then everyone needs to sign up, not just insurers,’ he said. 

Employers under pressure to cut pension costs are likely to jump at the chance to reduce their liabilities by offering former employees an ‘enhanced transfer value’ (ETV) to take their pension elsewhere. But as experts have pointed out, it is seldom in an employee’s best interest to switch out of a final-salary pension scheme. 

Similarly, it is rarely in the employee’s interests to move from a defined benefit scheme, where all the risk of providing an adequate pension is carried by the employer, to a defined contribution scheme, which may not provide a realistic income at retirement. How will the unadvised individual know whether the ETV offered by their former employer is reasonable?

Beware of surrendering valuable annuities

For the unwary and those who don’t have the benefit of advice an execution-only consolidation platform is fraught with danger – even if individuals are consolidating only ‘money purchase’ defined contribution pensions. Will investors have sufficient experience to know that they could be giving up hugely valuable guaranteed annuities on personal pensions, particularly if the policies were written many years ago when annuity rates were much higher than today? 

Many may want to consolidate their pension policies only to discover that there are huge penalties for doing so, particularly if they are ‘with profits’-type policies subject to a punitive ‘market value adjuster’.  What about increases in charges which, over time, can seriously diminish the value of the ultimate pension pot? A rise in charges from 1% a year to 1.5% a year may not sound much, but over 20 years it will have a significant detrimental impact on the accumulated savings.  

One of the major problems is that for a person with, say, four pensions each worth around £3,000, the cost of advice is out of proportion to the amount involved. Most IFAs need to charge around £125 an hour, and it could easily take four hours to establish if just one former employer’s offer of a transfer value is reasonable, let alone four.

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4 comments so far. Why not have your say?


Nov 08, 2011 at 18:42

Then set up a platform that excludes DB arrangements and that will significantly reduce the problem. If you want to address the charges and Annual Management Fee issue then come up with a simple declaration on all transfer quotes giving the fee structure for the old provider and the same fee structures for the new provider. It will then be down to individual choice.

If you want to go any further you are into advice and that just isn't tenable for small pots.

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Keith Snell

Nov 08, 2011 at 23:21

The Pensions Industry in my experience is woefully inadequate to advise anyone indepedently, I have 4 pensions and found the level of advice from pension providers, large insurers and banks was dreadful. The idea of leaving the industry to advise is appalling, for that to work entire industries would need a sea change in business ethics and regulation which is highly unlikley to occur.

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Nov 09, 2011 at 09:43

The power of inertia - and the fact that most punters don't understand pensions - means that this is a non-starter anyway, quite apart from the fact that it would only work if everyone signed up to it - which they won't.

What we need is more financial education in the ten years before retirement, and a really simple self-invested personal pension which doesn't cream off excessive charges for giving minimal service (they do exist - I've got one).

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Dr Jimbo

Nov 09, 2011 at 10:19

I think the whole concept of pensions is now fundamentally flawed. Recent turmoil in the Eurozone has cost pensioners who are actually in drawdown or about to receive a pension billions of pounds. This is an apalling situation brought about by an industry which is essentially betting pensioners money investments daily whilst telling pensioners they must "take a long term view". The complexity of pension regulations is also absurd and in reality is nothing more than a fig leaf to insulate the Treasury from supporting pensioners who have insufficient income. The recent GAD limits speak volumes of the nanny state protecting itself.

My own SIPP pot has dropped 13% since July but my IFA keeps saying "take the long term view, don't panic". This is bad advice but I have no wish to become a day trader to protect my SIPP value and I am sure this goes for the majority of pensioners.

I have been banging on about this in these forums for some time now, but I believe the Government should allow pensioners full and immediate access to the whole of their pension savings. Many of us with SIPPs would use this money wisely to help our children buy homes but we would not put it into the casino of the stock market.

If this idea was adopted now, between 100 and 200 billion could be released into the economy to spur growth. This would generate tax revenues far in excess of the sums now paid under the measly drawdown rules and the banks would receive deposits to hugely improve their equity ratios.

Pensions are a ripoff and instead of creating a new financial merry-go-round government should reduce regulation and release their dead hand on the savings or ordinary folk.

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