"In particular, companies who have big ‘back books’ of older and possibly poorer value pensions could see large net outflows unless they get serious about the consolidator market.”
While the dashboard is likely to address the small pot problem by creating a single view of all holdings, Aylwin says, it is unlikely to be the answer to the problem.
This is because without education and/or advice the majority of people are unlikely to understand the implication of multiple small pots and will still defer any action until the retirement stage in the “false comfort” of being able to ‘see’ all their money.
Aylwin says: “Consolidation is currently a cumbersome, complex process. Without [certain facilities] such as current account switching or the pot follows member regulation we see in mainland Europe, many people are likely to be put off consolidation.”
Another way people can consolidate their pension pots is via their workplace DC schemes.
However, James Murray says the advantages of transferring pots into workplace schemes are limited in the underlying fund choice and often push retail investors into default funds or, even worse, lifestyle funds, which have already received huge negative coverage in the media of late.
He adds that consolidating into a workplace scheme also potentially means clients circumventing or missing out on taking any professional financial planning advice, “for example, what their risk profile really is.
“Just because you are 60-years-old does not mean you should be scaling back the risk and equity exposure of your portfolio if your actual plan is to pass the pensions onto your beneficiaries.
"This is where lifestyle funds fall flat on their face as they typically make large assumptions and treat everyone the same."
Managing costs
Costs could also be an issue and is something policyholders should be mindful of, pensions experts caution.
The consolidation of pensions pots should lead to an increased average pot per investor and lower fees per investor as a result, however, Aylwin says there is also an economic reality that firms need to make money in order to survive.
“It could be argued that current fees have been calculated on average holdings/transactions per person etc. There is a risk that fees just increase to cover the larger average or certain transactions (such as transfers in/out) attract additional fees.
“It may also be argued that consolidation needs advice and therefore the ‘fees’ just move to a different part of the value chain.”
