Small pension pots to "follow scheme members" from job to job under new Government plans

Its 'pot follows member' model will automatically transfer small pension pots created in auto-enrolment schemes to a new employer's scheme when the worker changes job.

The current rules make it difficult for people to combine smaller pension pots from different jobs, according to the Government, which has said that unless it takes action 50 million small pension pots could be sitting dormant by 2050. One in six people have "no idea" where their pension is saved having lost track when changing jobs, according to research cited by the Department for Work and Pensions (DWP).

"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," Pensions Minister Steve Webb said. "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."

The automatic transfer method was one of several models consulted on by the DWP at the beginning of the year. According to the department's consultation response (48-page / 950 KB PDF), the approach will give far greater levels of consolidation and could halve the potential number of dormant pension pots by 2050. It will also, the DWP said, providing the biggest reduction in administrative costs for pension providers in the long run.

However pensions law expert Simon Tyler of Pinsent Masons, the law firm behind Out-Law.com, said that the approach would still involve additional administration.

"The consultation response does not make it clear who is going to take responsibility for this, and how much it might cost," he said. "However, the Government's proposal is to be welcomed. Small pension pots can be more trouble than they are worth. By consolidating them members can build up pensions that are worth having, meaning small funds are much less likely to slip between the cracks."

During the consultation process the Government decided against adapting the current voluntary transfer framework, although it noted that a pensions industry working group was currently exploring potential improvements. "Giving people more information or encouragement is unlikely to be enough to encourage them to make active decisions," it said in its consultation response. It also decided against the introduction of a centralised or industry-specific aggregator scheme - an approach preferred by trade unions and some in the pensions industry - because there would be limits to the amount of consolidation possible. Without a very small limit to the consolidated amount of pension saving there would be competition issues and potential market distortion, the Government said.

Subject to legislation, the initial proposals will apply to pension pots created under automatic enrolment schemes. Auto-enrolment will begin for the largest employers from 1 October this year, with smaller employers due to follow in a staggered implementation programme. Pension rights under defined benefit schemes and 'legacy' pots, which pre-date automatic enrolment, will not initially transfer automatically due to the complexity of these products. In addition, pension scheme members will be able to opt out of automatic transfers.

The Government said that its consultation uncovered "concern" that people who transfer pension pots out of defined benefit schemes, which are schemes that promise a set level of pension on retirement no matter what happens to the value of the scheme member's underlying contributions, risked losing "valuable rights". Respondents also considered "the likelihood of the benefits of a defined contribution scheme being equal to or better than those of a defined benefit scheme to be remote", and that these schemes would impose additional administrative burdens.

Webb also stated his intention to abolish short-service refunds, where pension contributions are repaid to employees who leave their role before they become entitled to any rights under a pension scheme. Noting concerns from consultation respondents that there is a case for refunds of "pots so tiny that they would not be worth transferring", he said that he would instead consider an alternative mechanism for refunding small pension pots to savers.