Another growing blip on the pensions radar…

There is an awful lot going on in the pensions arena at the moment. Indeed, the radar for the next couple of years is jam-packed with actions that employers need to take or be aware of. And as these legislative blips move ever closer to their target date, so employers need to spend more time understanding the issues involved. One such topic is the subject of pension fund automatic transfers, which is targeted to commence in autumn next year.

So what is the automatic transfers project, why is it being introduced and what does it mean for employers?

To understand the necessity of this issue, we need to consider how automatic enrolment (AE) has changed the dynamics of workplace pensions in the UK. Before 2012, it could be argued that most savers in company pension schemes were, to some extent, engaged with the pension-saving process. The reason for this is that the vast majority of savers had to physically sign up to a pension plan and then make a number of active decisions and choices before the plan could be established.

AE has probably gone some way to reversing this process in the short term. Employees are no longer required to take an active role in joining a pension scheme, with inertia (or a lack of objection) being the trigger to activate pension scheme membership. Given this inertia-led joining process, it seems likely that many of the new savers will have little active interest in their pension savings in the early years.

So what’s the problem?
Most UK employees will have a number of employers within their working life. In each new employment, they will automatically be enrolled into a pension scheme, even if they only stay with that employer for a matter of a few months. This will result in a vast number of small pension funds being created and administered by the pension providers. More importantly, there is also the very real possibility of such funds being forgotten about by the saver over time, and therefore being overlooked or lost when the individual comes to eventually take retirement benefits.

Given this, a process has been under way for some time (headed by the minister for pensions) to find a solution to this issue of small pension funds. The answer is automatic transfers.

The intention is to introduce a ‘pot-follows-member’ approach, whereby the funds saved will automatically transfer to the currently in-use AE pension scheme each time the employee changes jobs. This gives the impression of being an entirely sensible and straightforward solution to the issue. Yet in reality, it is really quite challenging following this approach without disadvantaging at least some savers. This has been recognised, and to reduce the number of potential issues certain limitations in the process have been introduced. The following criteria* are likely to be the ones used for this process.

To be included in the automatic pot-follows-member transfer process:

  • Pure money purchase benefits with an employer connection where the value is less than £10,000 and where the pot has been deemed to be dormant
  • Pots where the first contributions were received on or after July 2012
  • Pots accumulated in a charge-capped default arrangement

To be excluded from pot-follows-member transfer process:

  • One-member schemes
  • Executive pension plan
  • Small self-administered schemes (SSASs)
  • Pots that have been subject to a benefit crystallisation event
  • Money purchase schemes with guarantees or promises (for example a third-party promise)
  • Additional voluntary contributions that do not meet the definition of a qualifying scheme

This process is likely to be introduced in two stages.

  • Phase one: This is targeted to commence in autumn 2016 and will be used to test that the system actually works. This will not be the final process, and employees will have to ‘opt in’ (i.e. take some physical action) for the transfer to proceed.
  • Phase two: This will be introduced ‘as soon as practicable’*, and will be the fully automated process where transfers will take place automatically unless the employee elects to ‘opt out’ of the process.

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So it looks a little complex; however, the automatic transfer process is intended to be managed by pension schemes and providers, rather than employers themselves. So the actual logistics are unlikely to be an employer issue. Despite this, employers will still need to understand the principle and processes so that they can communicate and respond to employee queries correctly.

*All details based on DWP ‘Automatic Transfers’ document published February 2015