Automatic transfers require liquidity and investing in less liquid assets pulls in the opposite direction.
'Pot follows member', in particular, throws a spanner in the works by placing pots below the threshold in potential motion until they grow above the threshold.
As the threshold may go up over time, at a pace that is impossible to anticipate, you could easily see a situation where a scheme might have to, theoretically, be able to move upwards of 25 per cent of its book on an annual basis.
No one is going to want to get their feet wet with illiquid assets with 'pot follows member' on the table.
The risk of liquidity mismatch is just too great and hard to mitigate.
The risk is mitigated with the consolidators’ solution – it would continue to exist for schemes that are not consolidators but the consolidators themselves would have the scale and stability to invest in a wider range of asset classes.
Finally, the key issue here is understanding the internal economics of schemes.
Workplace pension schemes are really two businesses. There’s a front-end focused on distribution and collecting and processing contributions, and there’s a back-end that manages assets over the long term.
The former provides the assets under management, but the latter provides the revenue. Without the former, the sector doesn’t really exist.
It’s not the profitable activity, but without it, there is no workplace pension saving.
Schemes that carry out both activities are essential to workplace pension saving as without them there’s no workplace pension saving.
They are, however, vulnerable to the unbundling of the two activities.
That happens when members transfer out voluntarily or, potentially, where policy forces them to move.
Unbundling is an inevitable consequence of forced consolidation of small pots.
However, it needs to be managed in order to render the market sustainable. That means careful consideration of the definition of a small pot.
It also means ensuring that the dynamics of pot consolidation do not dismantle the internal economics of the schemes currently delivering automatic enrolment.
So, there is a lot to consider, and it isn’t just about what happens with £100 or £200 cases.
This has the real potential to disrupt the market. It’s now up to the DWP to make sure that any disruption is in the best interests of savers.
Phil Brown is director of policy at People’s Partnership, provider of The People’s Pension
