Steve Webb's potty time

The Minister for Pensions, Steve Webb MP, has now outlined Government plans to help “millions of savers take their workplace pensions with them when they change job”.

By 2018, all employers will need to offer a workplace pension and satisfy automatic enrolment requirements in relation to relevant employees.

The DWP estimates that, on average, people have 11 jobs over the course of their working lives. That being the case, the Government is concerned that when people move job they leave behind a small pension pot which may get stuck in the system. Without change, it is suggested that too many people could end up with an ever increasing number of small, scattered pension pots and an inadequate retirement income.

To address these concerns, the DWP consulted in December 2011 on improving the system of transfers and small pension pots. Central to that consultation were two automatic transfer approaches for money purchase schemes.

Option 1 would have brought together an individual’s small pension pots into an aggregator scheme.

Option 2 anticipated the transfer of small pension pots when an individual joins a new employer into that employer’s automatic enrolment scheme.

Ambitious choice

Whilst there was general support for the automatic transfer proposals, just over a fifth of respondents to the consultation apparently expressed a preference for option 2. Notwithstanding that, and the highlighted difficulties of transferring between what may be wildly different pension arrangements of employers, Steve Webb concluded that an aggregator approach (i.e. option 1) would not meet the Government’s objectives for reform, and favoured the more ambitious option of automatic transfers into the new employer’s scheme (i.e. option 2).

In line with that, the Government has outlined proposals for the new system. In summary, those proposals are that:

• automatic transfers will take place between money purchase schemes;
• automatic transfer will apply to all members in workplace pension schemes who are workers;
• a pot will be eligible for automatic transfer either once all contributions have ceased and the individual has left employment, or once all contributions have ceased for a prescribed period;
• a pot will be eligible for automatic transfer as long as the pot was created after a certain date;
• the pot limit will be £10,000, with a requirement on the Secretary of State to review the limit and revise it if appropriate;
• there will be an option for members to opt out and leave their pension pots in their previous employer’s scheme, retaining the right to initiate a transfer to an alternative pension arrangement;
• standards for automatic transfer schemes will be prescribed, and the Government will work with interested parties to develop a transfer process;
• regulations will specify what information should be given to the member, and by whom, so that the member is properly informed about the nature of the transfer process and the effects it may have on their benefits;
• the Pensions Regulator will be the main enforcement body for the automatic transfer process;
• short service refunds are to be withdrawn for those in money purchase schemes from 2014.

Desired outcomes?

Whilst, in principle, consolidating small pots might be a sensible idea, it seems a system which automatically transfers pots from one employer’s scheme to another employer’s scheme is likely to be mindblowingly complicated. Consolidation of pots will also run contrary to the risk diversification inherent in the current system. The risk of members suffering detriment as a result of such transfer is a real one. The risk of that transfer process being abused by the unscrupulous should also not be underestimated. As in the case of “debt consolidation”, consolidation of small pension pots will not necessarily be a good thing. Communicating options (without that presenting risk) to employees who move employer will be extremely challenging.

One does wonder whether what is proposed will present more of a risk to members than the prospect of several small pension pots. Administration of this new complicated system will of course come at a cost, which presumably will be ultimately met by the members and/or employers.

With much detail still being worked on by the Government, it is to be hoped that this exercise might cause a reassessment of whether an alternative option might be more likely to deliver the desired outcomes (particularly for members and employers).

In the meantime, abolition of short service refunds of contributions to members (from 2014) will, in the short term at least, create many more small “stranded” pension pots.