01 March 2021

Henry Tapper, chief executive officer of AgeWage, outlines radical proposals and the CIPP’s key role

A major calamity for payroll has been averted thanks to prompt and decisive action by the Department for Work and Pensions’ (DWP’s) small pot working group (‘the working group’). Proposals put forward by Hargreaves Lansdown would have required payroll to pass contributions to each saver’s ‘pot for life’. This would be fine if the saver’s pot for life was the employer’s workplace pension, but for new joiners and for pension savers who fancied choosing their own pension, big problems loomed for payroll.

Those who have struggled to clear contributions to one pension provider will appreciate that the prospect of limitless interfaces would simply have been inoperable. My understanding is that the views of CIPP, which chaired the implementation committee of the working group, were crucial to the group’s decision to ditch the proposal. The group’s report concluded: “A lifetime provider solution would introduce a fundamental change in how workplace pensions operate and could result in losing the benefit of inertia, which AE [automatic enrolment] has been built on, unless an approach was developed that did not rest on new employees having to provide existing pension details to new employers. In addition, it would also be complex and place an increased administration burden on employers and payroll as they would need to deal with paying contributions into multiple schemes.”

The decision to ditch this payroll-breaking proposal, however, did not put the kibosh on reform. The Pension Policy Institute have modelled how auto-enrolment proliferates small member pots meaning that by 2030 we might have 28,000,000 pots with less than £1,000 in them; the DWP has previously estimated that by 2050 there will be 50,000,000 abandoned pots.

There has been a school of thought that savers would get their act together and consolidate their pension pots – especially once the much-heralded dashboard arrives. However, the working group has determined that member action will not on its own be enough. So, to bring people’s small pension pots together, the working group is proposing that master trusts and other workplace pensions conspire to exchange members to the benefit of both the members and the schemes they join and leave. This will be known as ‘member exchange’, which will work like those exchanges of prisoners we used to see in the cold war. To use the prisoner exchange analogy, members will be lined up on either side of the bridge and at an agreed time, they will march past each other to their new homes.

...as ‘member exchange’, which will work like those exchanges of prisoners we used to see in the cold war.

While the concept is easy to grasp, there are some hurdles to leap before next summer when a pilot is due to be launched. Firstly, there needs to be a reliable member identification system to allow pots to be accurately allocated to members.

There also has to be a universally recognised rationale for the selection of appropriate consolidation vehicles. Crucially, if public confidence is to be achieved, there must be robust safeguards against fraud.

The working group has come up with a solution to these problems which focuses on the government’s favourite measure: “In addition to looking at this in the context of trust-based schemes, consideration will also need to be given to contract-based schemes concerning transfers without consent. Trustees/independent governance committees (IGCs) would need a common value for money assessment framework in order to enable pension pot exchanges without potentially creating unacceptable risk to the member or unacceptable burden on the trustee/IGC.”

While member exchange has advantages in consolidating the already fragmented service histories of pension savers, it is not a forward-looking policy – it does not stop pots proliferating in future. Beyond the immediate remedy of member exchange, the working group is proposing what the pensions industry is calling a ‘master pot’. The master pot collects small pots as they are left and is allocated to the saver either because it is run by the saver’s first provider or by means of some random selection called ‘the carousel’. It is proposed that savers would have an override so that they could deem the provider that would automatically pick up their small pots after them.

It is quite extraordinary that the working group has delivered an 86-page paper covering so much ground in only three months. It is (by pension standards) a very good read, and if you fancy following the arguments in more detail you can do so using this link: http://bit.ly/3h7Iuac.


Featured in the February 2021 issue of Professional in Payroll, Pensions and Reward. Correct at time of publication.