Pension pots will follow employees when they change job, potentially halving the number of dormant pots by 2050, the Department for Work and Pensions has confirmed.
Dropping the aggregator model proposed by some life offices, the DWP said it had opted for ‘pot follows member’ because of the potential for reduced charges and because it is the most popular option with savers, according to ABI research.
It is understood that the DWP is considering four levels of limit for automatic pot transfer – £2,000, £5,000, £10,000 and £20,000.
The DWP has dropped plans to proceed with other approaches to the small pot problem that included a suggested central aggregator and a virtual aggregator. It says its proposals are necessary because current rules make it difficult for people to combine their pension pots as they move jobs, leaving money stranded or lost completely. Without action 50 million pension pots could sit dormant by 2050, it argues. It points to research showing that one in six people have no idea where their pension is saved, and estimates putting the total value of unclaimed pensions at around £3bn.
Minister for pensions, Steve Webb says: “We need a system where people build up worthwhile pension pots in one place rather than having lots of small pots all over the place. But at the moment every time someone moves to a new job there is a risk that they leave behind a small pension pot which they lose track of. Our plans will mean that individuals get better value for their savings and bigger pensions as a result.
“Automatic enrolment will help millions of people save into a pension, with a contribution from their employer. Our overall goal of getting millions more people saving would be completely undermined if people are let down by a set of rules that mean people lose track of money saved and miss out on vital income in retirement.“
Otto Thoresen, Director General, Association of British Insurers says: “Our consumer research tells us emphatically that people want to be able to take their pension pots with them as they move jobs. We are pleased that the Government, after considering all the issues, have announced their intention to develop a ‘small pot follows member’ design. This will reduce the number of lost or stranded pots and give people greater choice as they will have a larger pot when buying a retirement income.”
Aegon regulatory strategy manager Kate Smith says: “We’re disappointed that the government has decided that a virtual data hub isn’t part of the small pots solution. A virtual data hub has advantages over the ‘pot follows member’ model as it can give one view – in one place – of the individual’s pension without physical transfers. We still believe a virtual data hub has a role to play. However, we are pleased that the government has listened to industry concerns and has decided to limit automatic transfers to automatic enrolment schemes, with a consultation on various cap limits.
“We do have concerns that achieving one single ‘big fat pension pot’ by automatic transfer, instead of by using professional advice, could lead to some customers being disadvantaged. Restricting automatic transfers to those from a-e schemes mitigates this risk, as does a cap on the amounts which can be automatically transferred. Professional advice needs to be part of the solution for all but the smallest of pension pots. However, we do recognise that accessibility to advice will be an issue for many people. Above certain levels, advice is definitely to be recommended.”