The Department for Work and Pensions (DWP) has announced it will implement a new system where workers can take their small pension pots with them if they change jobs.
Currently the rules make it difficult for people to combine their pension pots as they move jobs, which means that people won't be able to have their savings accrue to a substantial pension and sometimes even lose money. DWP figures show that without action 50 million pension pots could sit dormant by 2050.
Not only will the proposed plans give far greater levels of consolidation and could halve the potential number of dormant pots by 2050. It would also provide the best reduction in administrative costs for pension providers in the long run, potentially offering further benefits for savers in the form of lower charges.
The new plans are the result of a government consultation on small pots in December last year, during which the DWP proposed two models for small pot consolidation.
The new pot-follows-member model was chosen in favour of the aggregator fund proposal, which would see a system being created in which small pension pots would be automatically moved into a central fund with an organisation such as National Employment Savings Trust (NEST).
Announcing that the new government design for pension savings, Minister for Pensions Steve Webb said the plans will mean that individuals get better value for their savings and bigger pensions as a result.
"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. But at the moment every time someone moves to a new job there is a risk that they leave behind a small pension pot which they lose track of," 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."
The chief executive of the National Association of Pension Funds (NAPF), Joanne Segars commented on the proposals by saying the new plans still left too much to chance for pensioners and did not do enough to ensure better outcomes.
She said: "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 all agree that the increasing number of small pots is a problem that needs tackling, especially with auto-enrolment around the corner.Small pots mean that people could get worse retirement outcomes, with higher charges eroding the value of people's hard-earned pension saving.
"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.
Segars also said that the NAPF believes a better solution would be to allow people to transfer their pensions into large-scale, low-cost aggregators which according to the organisation are simpler and better placed to deliver good member outcomes.
The NAPF said it calculated that if someone with a pension pot of around £10,000 and an annual management charge of 0.5% was then moved into a pension with an AMC of 0.9% a year, then they would lose around £1,500 or 10% of their pot after 25 years.
First published 18.07.2012
azeevalkink@wilmington.co.uk
