Need to know:
- Significant amounts of money are tied up in small pension pots, many of which may have been forgotten.
- The Pensions Tracing Service can help people reconnect with lost pensions.
- Employers can help staff with this process and engage with pensions more generally.
The UK is sitting on a ticking timebomb when it comes to small, and forgotten or lost, pension pots, whether these are older employer schemes or more recent auto-enrolment plans. The Pensions Policy Institute's briefing note, Lost pensions; what’s the scale and impact? published in October 2022, estimates lost pension pot values have increased 37% to over £26.6 billion in recent years, while the Department for Work and Pensions’ call for evidence in 2023 suggests there are already roughly 20 million deferred pots worth less than £10,000 across the whole defined contribution market, representing an estimated £30 billion in assets.
Georgina Jones, a partner at law firm Sackers, says: “There are many potential benefits of consolidation, including reducing administration costs, which will enable pension providers to provide greater value for money to their members.
“Consolidation should also improve member engagement as it is easier to take an interest in and keep track of one larger pot of money than several small pots.”
For employers, helping staff tackle this issue can be beneficial, both in terms of employee appreciation and in ensuring people are able to afford to eventually retire.
Tracing options
For many years, the pensions industry has been calling for a pot-for-life approach to tackle this issue, while the long-awaited pensions dashboard should also help. Encouragingly, the new Labour government has also pledged measures to prevent people losing track of pension pots in its Pension Schemes Bill.
Until such initiatives bear fruit, however, employees, and employers which can help them, find themselves reliant on a two-stage approach. The Pensions Tracing Service is a good starting point, says Lizzy Holliday, director of public affairs and policy at Now: Pensions.
“This is a free-to-use service that can help employees to track down their old pensions,” she says. “The service contacts HMRC and the Department for Work and Pensions, as well as pension providers, trustees and previous employers, to help employees to track down any potential pensions savings.”
The next stage is to then contact those pension providers, update details and assess whether it is worth consolidating pots. Graeme Howell, employee benefit consultant at Mattioli Woods, says: “They certainly do not have to transfer their pots if they do not wish, but it might be in their interests to take advantage of potentially lowering their annual management charges on older pensions so long as they are not giving up any guaranteed benefits. All the leading pension providers have a free-to-use pension transfer service.”
The current arrangement, though, is not easy, says Dan Klein, founder of the Compound pension app, which aims to address the issue of pension tracing as part of its offer when it launches. “The process currently can be very tricky, with people being required to trawl through their emails to find their old policy number, along with the pension provider, before contacting them to arrange the transfer,” he says.
Employers can also help staff in other ways. Paul Holland, chief executive officer (CEO) of digital communications standard Beyond Encryption, says: “One straightforward adjustment that can significantly enhance future pension tracing is requesting personal email addresses from employees. Many employees register with their pension providers using their work email addresses, which results in key contact information being lost when they change jobs.”
Advice and guidance
Facilitating access to financial advice and education can also help engage employees, with both the need to consolidate pensions and their future retirement plans in general. “The good news is that this does not need to be onerous or expensive,” says Howell. “There are a wide variety of education providers in the market that can deliver education, guidance and, if required, financial advice. For the vast majority of employees, education is all that is needed.”
Incumbent providers can also support the employer by running seminars and producing tailored communication materials, says Paul Enderby, senior vice president at consultancy firm Redington. “At the same time, employers and their advisers should be challenging their pension provider to help members transfer in as simply and easily as possible, asking whether the style and language of the communication works for their people,” he says.
Effectively consolidating small pension pots can ensure employees are significantly better off when they come to retire, says Holland. “Consolidated pension pots have the potential to drastically improve the overall investment performance of funds and could even open up access to better investment opportunities and strategies, which would have been unfeasible with smaller, fragmented amounts,” he explains. “This optimisation of investment growth in turn supports the long-term value of retirement savings, ensuring people are better prepared financially for their retirement years.”
