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Does pension consolidation provide good value for money?

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As a result, the number of members, assets and future contribution flows has grown exponentially. 

Pemberthy says: “This well of money is very appealing for anyone with the desire to build and maintain pension schemes and has fuelled a competitive market. 

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“Scale is essential for anyone to compete effectively and this, along with regulatory pressure, is driving consolidation.”

According to data from Boring Money, 42 per cent of those that hold more than one pension are considering combining some or all of their pension pots, with 13 per cent looking to do so in the next 12 months.

The market size of those considering consolidating their pension is 6.3mn people, with a combined total of £435bn in their pensions.

Dominic James Murray, chief executive of Cameron James, says AE has already significantly increased the need for DC pension consolidation, adding that this need will only continue to rise over the next decade.

He says: “Since 2012, far more individuals find themselves grappling with former workplace DC schemes that they somehow need to manage or consolidate. 

“Another factor driving pension consolidation demand is technology. Investors are also becoming more familiar with technology, and staying up to date with pension pots that former generations would have forgotten about until retirement.”

While AE has driven demand for consolidation, it has also created a small pot problem, according to Alpha FMC’s Aylwin.

The pros and cons of pension consolidation
ProsCons
  • Easy administration. Having all pension savings in one place can make it easier to track contributions and investments. Dealing with one provider rather than several can save time and hassle.
  • Potential for lower fees. Although workplace DC schemes have low highly regulated fees other legacy schemes may be more expensive.
  • A clearer sense of how well-prepared policyholders are for retirement, and when they can retire, through one clear plan.
  • Limited investment options. Those who consolidate could potentially lose the choice of investment options that they may have had with other providers.
  • Potential for higher fees. Some workplace DC schemes have higher fees than other providers.
Source: Boring Money

People have numerous small pensions with a number of different providers, or in some cases numerous pensions with the same provider as their systems/processes focus on the scheme/employer rather than the individual.

However, this in turn has created somewhat of a need for an efficient consolidation process which has been, to date, somewhat lacking, Aylwin notes.

He says: “People who can access advice, particularly in later life approaching retirement, may drive consolidation. However, those who don’t are likely to remain with smaller, disparate pots until retirement, with an increased risk of ‘losing’ small pots they’ve forgotten about/lost track of.”

Dashboard drive

A big driver of more pension consolidation could be the pensions dashboard when it finally gets off the ground.

Webb says: “The pensions dashboard could eventually act as a real spur to consolidation. Although the go-live to the public is probably about three years away, schemes and providers are already having to start thinking about what it may mean for them. 

“Once people can see all their pensions in one place it will be human nature to want to simplify and move the money to one place. 

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