The Department for Work and Pensions (DWP) has now published details of rules to govern what must happen to an employee’s pension when they leave an employer. This regulation, generally referred to as ‘pot follows member’, makes provision for any pension pots of less than £10,000 to transfer with the employee.
There is sound reasoning behind this. Auto-enrolment takes advantage of employee inertia, but without a specific mechanism, it may result in many orphan pots becoming detached from their owners. This happened in Australia, where in October 2012, more than A$17 billion (£11 billion) was accrued in 3.4 million lost accounts.
True, the Aussies didn’t use a single identifying tax code, but it shows how much money can accumulate in a compulsory system in two decades.
Meaningful retirement income
Pot follows member seems perfectly fair and ensures that staff, particularly the lower paid, have continuity of a single savings vehicle to provide a meaningful retirement income and improve the governance of defined contribution (DC) schemes in the treatment of leavers. Excellent news, right? Well, not necessarily.
The proposals leave every chance for members to lose out because they will be automatically transferred into their new employer’s scheme. This will have to be a qualifying scheme under auto-enrolment, but no discretion will be exercised. It is feasible that the new scheme may not be as good, or could even be relatively poor. Charges could be considerably higher, too.
A friend of mine recently moved from one employer with an excellent DC scheme with an annual charge of 0.29% to another with a 0.75% charge. She didn’t join.
Member discount ban
And those are not the only charges levied on DC members. The DWP select committee has called for a ban on active member discounts (AMDs), which penalise deferred members (former employees) with a higher annual charge than active members. This would remove some of the problems of not moving pots with members for those with £10,001, perhaps.
However, the DWP has announced plans to ban a particularly damaging and largely unseen potential cause for detriment on a member’s fund in the form of consultancy charging for auto-enrolment.
Consultancy charging was the form of payment that was neither commission- nor fee-based and had caused a lot of headaches.
Certainly, the potential for damage to small pots belonging to low- to mid-earners who change jobs regularly is considerable, and will be a focus of research being conducted by Cass Business School.
This has repercussions for every employer, because it is further proof that auto-enrolment is not a one-time deal, but a regulatory burden that has to be borne
into the future.
Although responsibility for pot follows member falls on the pension provider, ultimately the employer will be held to account. If in doubt, ask your advisers and lawyers who a former employee will go to if they feel they have lost out following a transfer.
Employers need to be given hard and fast rules and, ideally, safe harbour, or they face the possibility of being punished for doing the right thing.
Pádraig Floyd is a contributing editor of Workplace Savings Quarterly
