The DWP’s proposals for an automatic transfer system for small pension pots has been met by widespread criticism from a wide range of stakeholders.
The CBI, NAPF, Labour Party and several pensions consultants have attacked the Government’s ‘pot follows member’ plan, accusing it of risking transferring pots to poorer value schemes, increase costs, introduce a short-termist approach to pensions and being unworkable.
The DWP has confirmed that pot follows member will be included in the forthcoming Pensions Bill. It has confirmed a limit of £10,000 for small pots to be transferred, and has extended the scope of the regulations to include all pots and not just those arising from auto-enrolment, in a bid to halve the anticipated 50m new small pots that would have been created by 2050. Legacy pots will not be included however.
Initially transfers will only be for money purchase schemes. Those in defined benefit occupational 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 industry to develop detailed options for how the process will work.
Minister for pensions Steve Webb says: “We want to make it the norm that when you move job 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.”
The CBI has reiterated its opposition to anything other than a virtual aggregator model. Neil Carberry, CBI Director of Employment and Skills, says: “Businesses would have preferred a virtual aggregator to an automatic transfer system. This would have been easier to implement and, crucially, avoided the risk of member detriment.
“The Government’s choice to opt for automatic transfers suggests a move away from guaranteed savings. These schemes need long-term membership in order to be viable.
Labour shadow pensions minister Gregg McClymont says: “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.”
Morten Nilsson, CEO of Now: Pensions has expressed concern over the decision to leave legacy pensions out of scope. He says: “It’s somewhat disappointing that members in legacy funds, many of which are far less cost efficient than some of the pension funds that were launched in the run up to auto-enrolment, will not benefit from this and they will continue to receive a poor deal. We also believe it is important to make it easier for and encourage people with pots larger than £10k to transfer to their new workplace pension if it is more cost efficient and has a quality default fund as consolidation is key.”
B&CE, which runs The People’s Pensions is the one provide that has been managing to deal successfully with small pots for many years. It is concerned that the proposals could more than double its admin costs and wants a full cost benefit analysis to take place before any big decisions are made.
Jamie Fiveash, director of customer solutions at B&CE says: “Whilst 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.
Richard Butcher, MD of Pitmans Trustees Ltd believes the system simply won’t work. He says; “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. Aggregators would give us 80 per cent of the big fat pot benefits at 20 per cent of the costs of pot follows member.”
Last October the NAPF warned that a ‘pot follows member’ approach could erode a person’s pension savings by up to 25%. It calculated that a person on half-average earnings who saves for 45 years would have a pension £82,000 in an ‘aggregator scheme’. However, this would fall to as little as £61,000 in a ‘pot follows member’ scheme due to high fees and variable investment returns.
Darren Philp, policy director, National Association of Pension Funds, says: “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.”
Caroline Legg, partner and member of the DC Team at Sackers says: “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.”
Kate Smith, regulatory strategy manager at Aegon, says: “Setting a pot size of up to £10,000 for auto-transfer looks about right. It will allow many employees with small pension pots to consolidate their pensions easily as they move from job to job. We believe that as individuals’ pension pots grow, they become more engaged with pensions. An automatic transfer solution will show this growth in fund size and encourage engagement.
“It’s interesting to see the break with schemes used for automatic enrolment. All money purchase pension pots set up after a certain date will be in scope, but we need clarity of whether this is a future or past date. We expect to see others out of scope taking more interest in consolidating voluntarily.”
“The DWP document assumes that employees won’t need advice under auto-transfer. But there may be occasions when people will seek advice to help them make decisions. The FCA will need to clarify its expectations of advisers under auto-transfer.”