Is automatic transfer of pension pots the best way forward?
04 March 2014
The government is facing a growing backlash over plans to push ahead with a new automatic transfer system for UK workers’ pension pots, with claims it could leave millions worse off.
The Financial Times (FT) writes that under the pot-follows-member proposals pension savings of £10,000 or less would move with a worker when they change jobs, instead of being left with an old employer.
With millions of individuals now being automatically enrolled in workplace pensions, the government has warned that without measures to ease transfers, up to 50m dormant pension pots could be created by 2050.
But unions, industry, consumer groups and campaigners for the aged have joined forces to express concerns that pot-follows-member, favoured by Steve Webb, the pensions minister, could lead savers into inferior pension schemes.
In a letter published in Wednesday’s FT, The National Association of Pension Funds, the Trades Union Congress, Which?, the Engineering Employers’ Federation, and Age UK, call on the government to change its plans.
“We are very concerned that the government is moving far too quickly to prescribe a system for automatically transferring pension pots every time a person moves jobs without having fully worked out how to safeguard savers’ interests,” said the jointly-signed letter. “Alternative proposals have been made to manage a number of these risks but these, like ‘pot follows member’, require more detailed thinking.”
The organisations warn under current plans, there was a danger of savers’ pots moving from well-run schemes to ones with higher charges and less robust governance.
“Savings could be switched out of investment assets into cash and then reinvested from cash into investment assets every time the member changes jobs and joins a new pension scheme, thus exposing savers to repeated transaction costs,” said the letter.
The organisations are calling on the government to accept amendments to the Pensions Bill, tabled in the Lords, which will see alternative proposals considered. The amendments are backed by three Labour peers including Lord Hutton, former cabinet minister and head of an independent review of public sector pensions.
A model, put forward by Labour, would see a dormant pension pot automatically transferred to a third-party pension scheme rather than to the new employer, when a worker changed jobs.
However, this “aggregator” approach was rejected by government in preference for pot-follows-member, due to the possibility that it could increase the number of pots.
“The government should adopt our solution which would be to only allow automatic transfer of pension pots into large-scale, low-cost pension schemes with a legal duty to prioritise the savers’ interest,” said Gregg McClymont, shadow pensions minister. “This would reduce bureaucracy, reduce risks and cut costs for savers.”
In spite of rising concerns, the government said it would press ahead with reforms it had been developing since 2011, saying that recent research had suggested they had public support.
“Now is the time for action, and pot-follows-member is what the public say they want,” said Steve Webb. “The only amendments available to vote on Wednesday would kick this policy into the long grass. We need to get on with this, and enable people to build-up worthwhile pots in a single place.”
The Association of British Insurers, which supports the government’s approach, said current initiatives “should ensure that no pension pot is automatically transferred to a scheme which has excessive charges or poor governance”.