Government's "pot follows member" pensions plan could risk savings, lobbyists warn

In a letter published by the Daily Telegraph a number of consumer groups, charities and pension funds urged the Government to consider "alternative models" of automatic pension transfer, for example allowing workers to 'park' their savings into low-cost 'aggregator' schemes.

"As employees move between jobs and their associated pension schemes, they may leave a trail of pension pots behind them, which may only contain a few hundred pounds each," the letter said. "We agree with the Government that a system that automatically transfers these small pots is necessary ... However the Government's solution, where the pot follows an employee who moves job, is impractical and risks reducing individuals' retirement income.

The letter goes on to state that pension scheme members will lose out as a result of the "significant administration burdens and transaction costs" imposed on pension schemes as a result of the proposals, which could also see savings transferred into "poorly managed schemes, with high charges and low investment returns".

The group – Joanne Segars of the National Association of Pension Funds (NAPF), Brendan Barber of the Trades Union Congress (TUC), Michelle Mitchell of charity Age UK and chief executive of consumer group Which?, Peter Vicary-Smith – have also written to Pensions Minister Steve Webb outlining their concerns, according to the Telegraph. The paper added that the final value of a person's retirement pot could be as much as 25% less than under an aggregator scheme.

"Having a pension automatically follow people from one job to the next could create a pensions lottery that leaves many people out of pocket," Segars told the Telegraph. "Our research suggests that a string of bad moves could see people lose a quarter of their pension pot, mostly to charges."

The Government set out its preferred method (48-page / 950KB PDF) for dealing with the small pension pots created under automatic enrolment schemes in July. Subject to legislation, its 'pot follows member' model will automatically transfer auto-enrolment pension pots to a new employer's scheme when the worker changes job. The method was chosen, following consultation, as the one which would provide the biggest reduction in administrative costs for pension providers in the long run while potentially halving the number of dormant pension pots by 2050.

Auto-enrolment began this month for the largest employers, while smaller employers will follow under a staggered implementation programme running until 2018. 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.

Pensions law expert Simon Tyler of Pinsent Masons, the law firm behind Out-Law.com, said that it was unlikely that the Government would go back to the lobbyists' preferred 'aggregator' model as it had already ruled out the creation of a standalone scheme during its original consultation exercise. It had concluded that such a scheme would result in "significantly less consolidation" for individuals and would not necessarily result in administrative efficiencies because "many individuals would have at least one active pot and one dormant aggregated pot", he said.

"Instead, the Government could take steps to prevent schemes imposing high charges," Tyler said. "There would then be no disincentive for members to take their pension pots with them when they moved jobs. Prohibiting high charges would allay some groups' fears about the automatic transfer model."

Pensions Minister Steve Webb, who has previously threatened "legislative action" on pension charges, confirmed that Government analysis supported the 'pot follows member' model.

"I am determined to make sure that people start to build up decent pension pots and keep track of them," he said. "For too long, an overly complex system has made it hard for people to transfer their money between pension schemes ... If people can build up bigger pension pots, they will pay lower charges and get bigger pensions at the end. Our analysis clearly shows that 'pot follows member' is the best way to help people to build bigger pots. It is time to stop debating different options and get on with making this positive change for consumers."