The pros and cons of consolidating pensions – and the employer’s role

How employers can support employees’ decision-making when it comes to putting all their pensions into one pot

Having worked in the pension industry for more than 20 years, the question I’m most often asked at social events boils down to: ‘Should I transfer my old pension?’

Scottish Widows recently shared with me that in 2022, 39% of questions asked at pension sessions were on consolidation.

When it’s difficult to get people engaged with pensions, finding something they want help with matters. The challenge is how employers can help.

Transferring defined benefit entitlements is complex for everyone involved. Sponsoring employers, trustees, and individuals should probably seek specialist advice.

Removing employers from the equation, what are the pros and cons of an individual consolidating pensions?

Broadly, this is about charges, features and engagement. Perhaps you can reduce the costs of a pension or get access to more suitable features.

There is evidence to suggest simply having their funds in one larger pot can help people be realistic about their position and perhaps pay more in.

The cons? They may unwittingly lose valuable features from an older plan, be convinced to move to a higher charging scheme in return for ‘services’ which add cost but no real value or, worst of all, they could be scammed.

How employers can help

Help them get help.

The Financial Conduct Authority is consulting on proposals to close the advice gap between full advice and basic information. Buck’s response reiterated that employers need clarity.

But, generally, it is simple for an employer to avoid giving full advice and they should not worry about this.

Employers rarely have an appetite to source or recommend a specific adviser. But some may do so indirectly. Some Independent Financial Advisers offer free workplace presentations, essentially to pick up employees as clients. Without due diligence on any firm involved, we would encourage employers to be wary of this.

But employers can support individuals to make good decisions about getting financial advice.

Sessions on how to find an adviser, the types of advice, how you pay for services, how the process works and red flags to look out for can help. Plus, it’s a way of engaging on the pension in general.

Send them to the pension provider

Signposting services from the incumbent pension provider can be a quick and easy solution. Most providers offer a fast, efficient and free way of consolidating pensions into the workplace scheme and are incentivised to do so.

Origo transfer standards, used by providers across the pension market, mean pension transfers could be done online in a few minutes, with minimal paperwork and at no cost.

Workplace schemes are usually competitively charged, plus differences in charges are likely to be dwarfed by possible differences in future investment returns.

They often have reasonable core features, enough investment choice for most people, and easy access to post-retirement options like drawdown.

Providers must also help people avoid losing valuable features. However, that is usually nothing more than the individual ticking a box to confirm they are not losing something they may not even know they have.

But at least through a mainstream provider you can feel assured employees will not get scammed.

There will unlikely be a personalised advice service, but a free, fast transfer of pension assets into a competitively charged modern pension with a mainstream provider is likely to be a reasonable outcome.

Consolidating pensions is complex, often with a trade-off between financial considerations and convenience. Some may want or need personalised advice, and be prepared to pay for it, while most providers offer a simple service likely to lead to a reasonable outcome.

Employers should support employees’ interest in consolidation by helping them understand the different services available and capitalise on their interest to engage more broadly in pensions.