Pensions specialist's report says 'waste' sees 'consumers paying the price'

A pensions specialist has hit out at a "fundamentally flawed" process that it said needed "urgent attention" in a new report. The Pension Lab, a pensions technology specialist, has published a white paper called What Lies Beneath, in which it said a "hidden" £442million annual cost of just one critical administrative process was affecting all consumers seeking regulated financial advice and/or pension transfers.

It said that was the "prolific, longstanding and yet overlooked" Letter of Authority (LoA) process for people seeking financial advice and/or transferring or consolidating pensions. As a legal document, a LoA authorises third parties such as advisers or pension firms, to collect information about and/or make changes to the authorising individual’s financial plans and policies.

The Pension Lab’s CEO and founder, Scott Phillips, said: “The LoA process is fundamentally flawed and it needs urgent attention. It currently makes the advice and transfer process costly and undermines consumer success in achieving their financial objectives.

"It’s not good enough by a long stretch. In addition to poor customer experience of lengthy delays, which is the most important thing here, financial firms also risk non-compliance with the Financial Conduct Authority’s (FCA) Consumer Duty rules, which mandate avoiding foreseeable harm and enabling customers to pursue their financial objectives effectively. Our white paper exposes the 3.9million LoA volumes and the consequent £442million that is wasted annually on a very important but very poorly executed administrative process – and it is ultimately the consumer who pays for the inefficiency of the system.”

As well as cost, a key frustration of the LoA process is the inherent poor customer experience, Scott said. Roughly 10% of the 3.9 million LoAs sent require a wet signature that is used as a form of identity check. He said the process "is archaic, requiring pen, ink, paper and post and it’s wide open to fraud and cyber security risks".

Another sticking point for consumers is the time it takes to process and delays, he said. Previous research from the lang cat, a specialist financial services consultancy, found that on average, the worst time delay for a LoA to complete is 59 days. And if the LoA is being requested as part of a transfer, this means the consumer has an additional wait while the transfer is then processed, leaving them in limbo for months before completion.

Octopus Money’s CEO, Ruth Handcock, added: “The Letter of Authority process can be a real headache for customers, involving lots of time, paperwork and back-and-forth between providers. We support The Pension Lab in this important campaign to put customers first and fix this outdated process once and for all.”

Scott added: “The LoA process is failing consumers. It is archaic, prolific, and costly – and it is neglected. It’s an outdated analogue process in a digital world. By revealing the sheer scale, costs, and detrimental effects of the LoA process on consumers, my aim is to bring it into the spotlight for urgent attention and acknowledgement. The white paper also details enablers for improvements, emphasising collaboration as central to our collective efforts to better fulfil our duty of care for the consumer.”

The Pension Lab said the next phase of collaboration involved hosting a series of roundtable workshops, "dedicated to advancing the key enablers detailed in the paper for improving the LoA process".