Government outlines plans to improve pension portability
Tuesday 17 July 2012
The Government outlined plans today to make it easier for people to take their work pension with them when they change jobs.
But fears were raised that the move could create a "pensions lottery", with people unwittingly seeing their pots automatically transferred into better or worse schemes as they follow them through their employment.
The Government believes its "pot follows member" plans could halve the number of dormant pension pots that would have otherwise been created by 2050 by making it easier for people to keep their pots with them.
However, the National Association of Pension Funds (NAPF) warned that if someone with a pension pot of around £10,000 and an annual management charge of 0.5% was moved into a pension with a charge of 0.9% a year, they could lose around £1,500 or 10% of their pot after 25 years.
It suggested that rather than transferring someone's pension pots when they move jobs, a better solution would have been to allow people to move their pensions into centralised low-cost "aggregator" systems.
Joanne Segars, chief executive of the NAPF, said: "While the Government's idea is one way to solve the problem of small pots, it does not tackle the risk that people might see their pension transferred to a worse scheme with higher charges and weaker governance.
"There is a real risk of a pensions lottery where people could be automatically transferred into better or worse schemes without them being aware of the impact ...
"We believe a better solution would be to allow people to transfer their pensions into largescale, low-cost aggregators which are simpler and better placed to deliver good member outcomes."
Unless the current system is changed, some 50 million pension pots could be sitting dormant by 2050, the Government estimates, and more than 12 million of these will be worth less than £2,000.
Under the current system, people need to take more active steps to consolidate their savings, meaning that smaller pension pots can be left stranded with a string of employers. Estimates have already put the total value of unclaimed pensions at around £3 billion.
Concerns have been raised that the number of dormant pots could sharply increase following a landmark scheme to automatically enrol up to 10 million people into workplace pensions from this autumn.
The plans are being put in place amid concerns that as people are living for longer, they are not putting enough cash aside to fund their old age.
Official figures released earlier this year showed that the proportion of people in a workplace pension has fallen below half for the first time in at least 15 years. Just 48% of employees were in a scheme, compared with 55% when the records began in 1997.
As many as one in six people are thought to have no idea where their pension is saved, and moving jobs has been put as the biggest reason for this.
Concerns have been raised that people who cannot consolidate their pension pots may be unable to access more competitive deals as annuity providers tend to require a minimum pot of at least £5,000 or £10,000.
The Government consulted on various approaches and it believes the "pot follows member" system will provide the best value in terms of administrative costs for pension providers, which has the potential to benefit savers in the form of lower charges.
Minister for Pensions Steve Webb said: "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."
Age UK, the TUC and Which? issued a joint statement saying they were "extremely concerned" by the Government's approach to small pension pots.
The groups said they also favoured an "aggregator" approach, where small pots could only be automatically transferred to a limited number of high quality pension schemes which would guarantee low charges, good governance and economies of scale.
The joint statement said: "In our view there are real risks of both consumer detriment and knock-on effects that could seriously hinder the success of automatic enrolment ...
"We strongly welcome the Government's commitment to dealing with small pension pots, and can see the attraction of 'pot follows member' as the simplest way of building 'one big pot'.
"But it seems unlikely that 'pot follows member' can be made to work without a radical transformation of the pensions system."
The bodies warned that the difficulties of dealing with people who move jobs frequently, hold multiple jobs, take career breaks, face unemployment and drop in and out of pensions saving are "severe".
Shadow pensions minister Gregg McClymont said: "Today's announcement is not the best deal for pension savers. Ministers must put the saver's interest at the heart of what they do.
"Steve Webb's proposals on small pots fail this test."
He added: "Right now, a pension saver could lose up to half of their pension thanks to hidden costs and charges in some of the worst cases - the Government's announcement today risks making a bad situation for the saver worse.
"This announcement comes on the same day that the Office for National Statistics reveals a further decline in the number of people saving into pensions."
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