The DWP has asked whether NEST should be the default provider for millions of small pension pots - are they mad?
Just before Christmas, the Department for Work and Pensions issued its promised consultation on short service refunds and small pension pots under automatic enrolment.
The consultation looks at various options, one of which is to set up an aggregator scheme. The general idea is that when someone leaves an employer, any small pension pot could be automatically transferred to said scheme but any ongoing regular premiums would be paid to the new employer's pension scheme.
There are many issues with aggregator schemes so I don't support the concept at all, but what particularly concerned me was one of the questions raised on page 38 of the consultation:
"What are the advantages of NEST acting as the aggregator scheme?"
Just say no!
In my view, it's a no brainer. There are no advantages of NEST acting as an aggregator scheme.
- Competition issues - There are established pension providers already out there and new mass market providers are entering the fray. All providers will aim to provide low cost pensions going forward, so why should NEST be singled out to receive potentially many millions more than anyone else? NEST getting all this extra money would mean that providers won't get it, affecting profits. This could lead to NEST gaining an unfair competitive advantage as providers seek to retain profitability by increasing charges.
- NEST who? – Individuals who have workplace pension savings and small pension pots may not have even heard of NEST. These individuals could see their small pot being automatically transferred to something they know nothing about that has nothing to do with their current employer. And then they could receive two sets of information – one from the current employer scheme, and one from NEST – causing confusion.
- Does NEST want the business? I can't say for sure – it's up to them to work that out. But there are some salient considerations. If NEST gets all these small pots, with no associated regular premium, this will put pressure on both their administration and their pricing model. In general terms, small pension pot transfers alone are more expensive to run that small pension pot transfers with a regular premium as well.
(Incidentally, the DWP appears not to have considered the biggest existing pension provider in the UK as an aggregator of small pension pots. But I suppose there are good reasons for that – it's called the state pension system...)
Other options
Just to make it perfectly clear - using NEST as an aggregator of small pension pots is only one of the many options discussed in the consultation. Other options include pension pots following people from job to job which to me, makes far more sense but will of course raise issues of its own.
Responses to the consultation are invited before 21st March 2011 and the final rules are expected as soon as 2014. We'll be putting together our official response soon which we'll no doubt share when it's ready. Needless to say, it's highly likely our response will not support NEST as an aggregator scheme.
This blog first appeared on the Scottish Life website and can be found in its original format here.
