Plans set out for automatic consolidation of UK pension pots by autumn 2016

The UK government is to draw up new rules to enable a worker's defined contribution (DC) pension savings to be automatically transferred (47-page / 223KB PDF) into their new employer's DC pension scheme when they change jobs.

The automatic transfers, or 'pot follows member', regime will only apply to pensions pots that were first contributed to on or after July 2012, where their value is no more than £10,000 and where the pot is "invested in a charge-capped default arrangement at the point of valuation", the Department for Work and Pensions (DWP) said.

Savers will initially be asked to opt-in to the consolidation of their pensions pots scheme. However, once automatic transfers are "fully operational" they will be facilitated on an opt-out basis.

The automatic transfers rules are set to be applied to the largest pension schemes from October 2016, with other pension providers being placed subject to the new regime some time thereafter.

Automatic transfers will be facilitated through a system of 'matching' any old pension pots with individuals who have changed jobs. Old pots that are eligible for consolidation with that individual's new workplace pensions scheme will qualify for transfers. The matching of pots to the correct individuals will be done by cross-referencing personal data attributed to each pot, including savers' name, date of birth, gender and national insurance number.

"When a worker moves to a new employer, the new scheme will need to check a 'network of interoperable registers' to see if there is a small pension savings pot which might qualify for transfer," said pensions expert Tom Barton of Pinsent Masons, the law firm behind Out-Law.com. "Pension schemes will need to populate these registers with data about workers and their pension pots. All of the different registers will need to be able to 'speak' to each other if this is to work. Automation is the key."

Barton said that the automatic transfers regime would have a cost burden for pension providers.

"The cost of pension transfers will need to come down if this is to be workable," he said. "There have been reservations about whether this is possible. There are challenges but there are potential solutions too. Outside of the pensions world, ways and means exist of achieving low cost 'money' transfers that could potentially be used here. It will be up to pension providers to deliver this policy, rather than employers. This is therefore another operational cost to contend with for low margin pensions business, in addition to increased charges and governance obligations."

Barton said the automatic transfers regime "sits quite well" with other reforms to the UK pensions industry set to take effect later this year. From April, members of DC pension schemes will have more freedom to access their pension savings in any way that they wish from the age of 55, without facing heavy tax penalties or necessarily having to purchase an annuity. This new freedom will be backed by a right to guaranteed free and impartial guidance at the point of retirement.

"The automatic transfers regime helps to make sure that savings wealth is consolidated and made the most of when an individual starts making retirement choices," Barton said. "It will also help to make the most of any benefit adequacy tools a worker has access to through the workplace, since investment and contribution decisions will be made by reference to all savings, rather than just the bit built up with the present employer."

However, Barton said that the new automatic transfers framework must not encourage fraudsters, including those behind pensions liberation scams.

"Particularly once the transfer of money becomes automatic, it is vital that there are sufficient safeguards in the system to prevent money being transferred automatically into the wrong hands," he said.