Aggregation is not the key

Article date: 13 September 2013

Today, Michael Johnson released his latest report ‘Aggregation is the key’, addressing the issue of small dormant pension pots. His paper recommends a combination of virtual aggregation and physical aggregation, with large aggregator pension schemes competing to hoover up small pots.

In his paper, Johnson says that Aviva’s alternative proposal is that employees’ pots should stay with their previous employer. This is not what we are suggesting at all.

Aviva’s joint proposal with Hargreaves Lansdown is that everyone has their own pension and carries that with them throughout their working life, in a similar way that they have one bank account into which new employers pay their salary. In 2018, once all employers have staged and eligible employees have been enrolled, the pension account that people have at that time will become their default account. However, everyone will then be free to switch that to any pension of their choice that meets the automatic enrolment quality standards.

Aviva and Hargreaves Lansdown’s joint proposal, ‘One member one pot’ (OMOP), puts the individual at the centre of their own retirement plans. The Australians, after years of persevering with a system similar to that in the UK, have moved to an individual account system to solve the problem of their millions of ‘lost pots’.

Michael Johnson’s paper is a welcome contribution to the debate but the solution he proposes is complex, unworkable and has already been rejected by government. However, one aspect of his proposals, the virtual aggregator, is worthy of further consideration, as this could ultimately allow people to see all of their existing pensions in one place.

In contrast, Aviva and Hargreaves Lansdown’s proposal for a one member one pot system is the ultimate in simplicity and cheap to operate. Moreover it puts the employee in charge of their own pension for the first time. If we want people to take responsibility for their own retirement, then empowering them to take care of their pension is an obvious first step.    

- Ends –

Notes to editors:

  1. Aviva and Hargreaves Lansdown have proposed a new OMOP system to address the problem of small ‘lost’ or ‘dormant’ pension (27th June 2013)
  2. The OMOP system would work just like a bank account. When the employee starts work at a new employer they would simply tell their employer what their pension account number is and their new employer would make payments into that account.
  3. In 2018, when employers have completed staging and all eligible employees have been enrolled, employees would simply keep the pot they already have and ask new employers to pay into that. They would be free to nominate any account of their choice as long as it meets minimum quality standards laid down by DWP and other regulators.
  4. Other industry commentators’ main objection to the OMOP system is that it will be difficult for employers to make payments into multiple pension pots for all of their employees. This is not true, because software, already operating in the UK and Australia, has solved this problem. The cost of further developing this software to allow seamless operation of OMOP would be a tiny fraction of the cost of the aggregator or pot-follow-member (PFM) proposals. And it would be a much lower-risk approach.
  5. As no money is actually transferred to another pension, there is no risk of the consumer detriment, for example transferring between pensions with completely different investment approaches, that is inherent in the aggregator and PFM models.
  6. The OMOP system is also secure, whereas the aggregator and PFM models are open to liberators and hackers as the money transfers from pension scheme to pension scheme. The difficulty and cost of making such transfers seamless and secure should not be under-estimated.      
  7. The problem of people having poor value-for-money pensions is also catered for in the OMOP proposal. Pensions that do not meet the quality standards set down by DWP in relation to governance, default fund design and charges would not be allowed to receive contributions from employers. 
  8. OMOP would only work with DC schemes, so employees in a defined benefit (DB) scheme would have to leave that pot behind if they moved employer. Likewise, if they join an employer with a DB scheme, they would keep their existing DC pot ready for the next time they work for a new employer. Defined benefit schemes are dying out and currently less than 2m out of 24m workers in the private sector are in one. By 2018, we expect membership of DB schemes to have fallen even further.

If you are a journalist and would like further information, please contact:

Diane Mangan: Aviva Press Office: 01904 684164/ 07800 691714:

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