The Department for Work and Pensions (DWP) has confirmed its plans to make it easier for employees to take their workplace pension scheme with them when moving jobs.
Its pot-follows-member model, which was first published in July 2012, will mean that over an employee’s working life any pension pots of less than £10,000 accrued will automatically move with them between employers.
Introducing automatic transfers is projected to reduce the proportion of people reaching retirement with five or more dormant pots from one quarter to one in thirty.
Initially, transfers will only be for money purchase defined contribution (DC) schemes. Those in defined benefit (DB) pension schemes will not be included at this stage.
Pension scheme providers and administrators will operate the transfer, but individuals will be provided with information and have the right to opt out of the process. The DWP is working closely with the industry to develop detailed options for how the process will work.
The government has also confirmed plans to ensure that money put into pension savings stays in, with the abolition of short-service refunds. This will apply to individuals who leave a trust-based money purchase scheme within two years.
Both plans will come into force once the forthcoming Pensions Bill attains Royal Assent.
Steve Webb, minister for pensions (pictured), said: “Instead of having lots of small pension pots all over the place, we want people to have a ‘big fat pot’ which will buy them a better pension.
“When people change jobs, they often leave behind a pension pot which becomes forgotten and which can even attract higher charges once they leave the [organisation].
“We want to make it the norm that when you move jobs your pension rights can move with you if you wish. This will reduce the costs of providing pensions and will help people to be much more engaged with their pension savings.”
We’re pleased that the government is moving ahead with the automatic transfer of small pension pots, although we do think that the £10,000 threshold is too low.
A recent study found that as many as one in four workers have now lost track of a pension, and it’s a trend which is only likely to continue given that very few people now have a job for life. While there may be charges associated with transferring pensions, it will normally make sense for people to keep their pension in one place as these charges are unlikely to outweigh the risk of losing track of a pot of money.
It’s unrealistic to expect every saver to fully engage with their pension and act as their own financial adviser. We recently undertook a study among people saving into DC pensions and 54% of people told us that they found literature from their provider difficult to understand. Against this backdrop, any process that helps people to manage and keep track of their pensions should be welcomed.
In principle, consolidating small pots must be sensible to avoid the inevitable complications that would otherwise arise at retirement. The difficulty is that those most likely to use this mechanism are more likely to be less sophisticated investors.
The description of the proposed new transfer scheme is confusing. Either this will be a system which automatically activates a transfer unless a member opts-out or it will be a scheme which tells the member that the transfer eligibility criteria have been met and the transfer is triggered by the member completing a form. In either case, the member communications will no doubt need to be comprehensive enough to be confusing to the average participant.
Introducing the date from which schemes qualify is sensible as presumably this would prevent the many high-charged legacy pension policies (many of which have termination charges) being involved.
However in the absence of sufficient protection, there is a risk that members will lose out when consolidating one small pot into another pot with less attractive features, such as higher charges or poor investment returns. Even worse, could this present an opportunity for unscrupulous advisers to attempt pension liberation exercises on large numbers of small pots?
In order to work, receiving arrangements need to have some sort of simple passport certification to limit charges and possibly limit investment choices.
This is a noble aspiration and one which would seem essential if compulsion is introduced. The challenge for the pensions minister is to create a workable regulatory infrastructure. Let us not rush into this.
The abolition of short-service refunds is likely to undermine demand and enthusiasm for occupational trust-based schemes where the employer can sometimes benefit from members taking refunds.
We may see increasing demand for contract-based pensions, such as personal pensions and Sipps as a consequence. The abolition of short-service refunds means once money is paid into a pension it will be preserved in the system to provide retirement benefits further down the line, without the risk of any of it leaking out again.
The introduction of small pot transfers will encourage consolidation which is also a good thing; around 75% of new scheme members with Hargreaves Lansdown already transfer in a dormant pension pot from an old scheme. The fewer pension pots you have, the easier it is to take control of your retirement savings and plan your pension income effectively.
The automatic transfer system will provide a useful default solution to small pots, however the best answer for most investors will be to actively engage with their retirement savings as this minimises the risk of sleepwalking into an impoverished retirement.
This approach could put workers’ savings at risk.
We are concerned that a worker’s pension could be automatically shunted from an excellent pension into a bad one with high charges. The government now recognises this, but we cannot be sure there will be strong safeguards in place.
A better solution would be to automatically transfer these small pension pots into a small number of large-scale, low-cost pension schemes. This would also remove the bureaucracy and expense that pension schemes will face when trying to ensure that a pot follows a worker automatically.
It is odd that the government is stopping pension schemes refunding pension contributions for short spells of employment before it has a clear policy on small pot transfers in place. This risks creating a whole new generation of dormant small pots.
The government says it is trying to cut red tape for businesses, but these proposals would introduce new costs for pension schemes and employers.
Before taking broad legislative powers in this area, the government needs to spend more time thinking of a workable, cost-efficient and consumer-friendly solution to this problem, and it should also run a full-impact assessment.
When the new minimum contributions are fully phased in [under auto-enrolment], a little under £2,000 a year must be paid into the pension pot of someone earning £30,000. Generally, it is only when an employee has been with an employer for several years that their pension pot will not automatically follow them out of the door.
How long it takes to reach the £10,000 threshold depends on earnings, contribution rates and investment returns. However, the intention is to make automatic transfers the norm, not just to sweep up the smallest pension pots of the most transient workers.
The minister thinks people will be more engaged with their pension savings if they’re all in one place. It is suggested that the limit would be reviewed at least every five years and the intention may well be to increase it in future. A starting threshold of £10,000 is not a surprise – this was the figure the government originally associated with the pot-follows-member model, so was always the leading candidate once it had rejected the idea of transferring small pots into Nest or other aggregator schemes.
This announcement contains few surprises on this long awaited, and not broadly welcomed initiative.
One of the main concerns raised on consultation was that benefits may not be transferred to quality pension schemes. The government proposes to counter this objection by setting out quality standards in regulations. An unfortunate side effect is that this will create another set of standards for schemes to meet, in addition to existing standards on automatic enrolment and contracting-out.
On the plus side, these standards are being introduced at a time when there is an increased focus on maintaining value for members. They could be crucial, for example, in the initiative on clarity of DC charges and clamping down on inappropriate transfers to pension liberation arrangements.
The government are still getting it wrong on small pension pots.
Ministers plans are vague and unconvincing and there’s still a big risk that savers’ pension pots can be transferred from good schemes into bad ones.
The only thing that is clear from these proposals is that the government must now lift restrictions on Nest to allow this high quality low-cost scheme to offer a safe harbour for small pension pots, and give everyone a chance to save into pensions people can trust.
The use of short-service refunds means that many people are not benefiting from an employer contribution, or building up a pensions pot for the longer term.
It is inconsistent with the policy objective of helping millions of people save for retirement through automatic enrolment. Putting a clear timescale on their removal is a welcome step.
We support the proposal to remove short-service refunds from 2014 — this is necessary to avoid regulatory arbitrage between trust-based and contract-based arrangements.
The market distortion that exists because of the use of active member discounts should reduce, since a significant proportion of leavers will trigger automatic transfers rather than becoming deferred members with higher charges.
We welcome reference to a statutory discharge for the transferable benefit scheme. This will give providers and trustees confidence that, when they make transfers under the requirements, they have no further legal obligations.
We will argue strongly for a technology solution to support the proposals, as a paper-based solution is a recipe for poorer customer service and higher costs in the long term.
And it’s clear, as we’ve previously stated, that the transfer restrictions for Nest should be eased, to allow transfers (in and out) for small pots.
There are, however, some areas for concern. For example, whether £10,000 is a suitable description of a ‘small’ pot and how the transfer process will operate. As further details emerge, we will continue to work with the regulators to help build an automatic transfer system that will benefit consumers and their advisers.
The haste to abolish short-service refunds is unexpected as the government had previously stated this would be timed to coincide with the introduction of the automatic transfer regime.
There is now the possibility that the new regime and its supporting IT infrastructure will not be in place when refunds are abolished leading to some money-purchase schemes being left with a large number of trivial pots.
The real challenge will be actually delivering a cost-effective and workable IT infrastructure, the difficulty of which should not be under estimated. We now anticipate a 2015 implementation.
The principle of consolidating small pension DC pots makes sense. There are too many legacy pension schemes holding legacy pension accounts that get lost or forgotten or that fail to deliver economy of scale. Bringing them together to form ‘big fat pots’ is a good idea. That said, I can’t see how the DWP’s proposals for pot-follows-member can work.
They’ve proposed two possible systems. The first involves a Pension Transfer Information Document (PTID). This is a sort of pension P45 that the individual will take to their new pension scheme giving them all that they need to effect a transfer. The problems with this are that often employers won’t know where to find their former employees and even if they do, it relies on the individual passing the PTID on. This is a huge paper trail with lots of places for the paper to get lost.
The second involves a central electronic pot-matching IT system. In principle, I can see how this will work, but the government hasn’t got a good record of delivering large IT systems like this. In addition, the detail of its operation will be frightening.
The DWP has said that it doesn’t like the idea of aggregators: a few large DC schemes that will catch orphan pots. Their argument is that you don’t get genuine aggregation. Given, however, that the DWP proposals for pot-follows-member will only apply to pots over £10,000, I can’t help thinking that their argument is spurious. Aggregators would give us 80% of the big fat pot benefits at 20% of the costs of pot follows member.
At The People’s Pension, we firmly believe in the benefits of a consolidated pension pot for members. Our pension scheme has been designed for transient workers, with frequent changes to employment.
While we welcome any improvement in transfer efficiency within the pension industry, we would urge the DWP to undertake a full cost benefit analysis of pot-follows-member before proceeding too far down the line.
We estimate that the implementation of pot-follows-member could increase our current administration costs by at least double. On average, employees will change jobs at least 11 times during their working lives. This can be much higher in transient industries, such as construction, hospitality, retail and facilities management. Therefore, the costs involved in building a transfer system, which can handle the volume, speed and variation of processing pension transfers will be enormous and should not be underestimated.
In our experience, as a pension provider to transient workforces over the last 30 years, we have also seen many members returning to us as they change employers. So, if automatic transfers were to take place, this could be at the member’s detriment. Ultimately, the impact of pot-follows-member will be to put up charges in the short term.
We are working with the DWP and other providers to understand the full impact and processes involved with pot-follows-member. It would certainly lower the cost to our members if small pot transfers were on a periodic transfer basis, as opposed to transferring on each employment period, as this would avoid transferring a large proportion of pots, which would come back to us again in the short term. Costs must be one of key considerations in designing this process so that one detriment is not replaced by another.