Making the argument that the UK can learn lessons from Australia’s “more mature defined contribution market”, it highlighted the high costs associated with the proliferation of small pensions pots, created each time a worker changes jobs.
Then this...“A typical Australian full-time worker was 6% ($51,000) worse off at retirement due to the higher collective administration costs of having multiple pots.”
Wow! That’s about £26,000 lost mostly on minimum administration fees as the employee has moved from job to job, adding many new small pots to their total retirement assets.
On top of this, it is broadly true to say that the older your pension pot, the more likely it will be that the fees are higher. So a worker’s older pots could be costing them dearly.
If the Australian experience is similar to ours – and you can bet it is – the potential dangers of not consolidating pensions is abundantly clear.
And if most consumers are not fully cognisant of the cost implications of having many small pots, they will almost certainly be attracted to the seductive marketing messages consolidation firms have been pumping out with increasing gusto in print, audio and moving pictures.
These communications centre around the promise of professionals tracking down pension pots that might be long forgotten and of people seeing their funds “all in one place”.
So there are clearly some good reasons to consolidate – and there are many companies that will help you do this. But there can also be a danger in consolidating.
The cost of losing pension benefits
A good regulated financial adviser will be only too aware of the raft of different rules and regulations and product features that have been marketed in the past but are no longer available.
The classic example is guaranteed annuity rates (GARs), which have allowed consumers to buy annuities at significantly higher rates than they might find on the open market.
There are also products called “section 32 buyout” schemes, which often allow you to take more than you can now as a tax free lump sum. These are products that you might be foolish to give up.
There can be terminal bonuses, loyalty bonuses and even guaranteed growth rates too.
And finally there's the whole myriad of opacity in old charging structures. Comparing like for like can be incredibly difficult for the layperson. You might be tempted to judge a proposition at the headline charge while ignoring all kinds of platform charges, policy fees, fund fees, bid offer spreads and exit fees. It can be an absolute minefield.
In summary, there can be a danger both in consolidating AND in not consolidating. Big help, huh? The truth is, it’s often a complex problem, which is why regulated financial advice would almost certainly be a good option in any consolidation decision.
The cost barrier of advice – and the technology solution
Onto an age old problem then – one we all understand well (and I have set out here): regulated advice is not always accessible.
The expense is one obvious barrier. Traditional advice models involve a qualified adviser meeting a client. When you’re talking about several relatively small pension pots, the case might not warrant that cost. Moving Pension A to Pension B to save 0.25% on an annual management charge could cost a client £2,000 in advice fees – meaning it could take years to recoup the difference.
This is where technology can come in. With an automated tool that can handle the case quicker and less expensively, financial institutions can open up this sort of advice to more of their customers.
Many large financial institutions are dealing with large backlogs of pension consolidation cases. Some have relatively few qualified advisers and bottlenecks are forming. Technology has the power to transform the speed, cost, quality and consistency of the advice they are providing in this area.
The implications of mass adoption of this sort of technology at banks, building societies, investment managers, insurers, financial planning firms and the like could be huge. Eventually, we could see huge reductions both in consolidations that end up losing customers pensions benefits and we could simultaneously see the consolidations market explode as regulated advice became more accessible.