There’s no doubt that auto enrolment is working. At the end of February, over 9 million people had been auto enrolled by over 1 million employers. This is no mean feat and is helping to make pension saving the ‘new normal’.
But, one of the inevitable side effects of auto enrolment will be a proliferation of small pension pots. Research we conducted revealed three in five British workers have already had at least four jobs in their lifetime, with one in ten over 55s having worked at more than ten different places according to our research.
As a result, over half have more than one pension pot and nearly one in ten have four or more – a figure which rises to one in four for those aged over 55.
Currently, the government predicts that there is more than £400m in unclaimed pension savings in the UK and, as a result of auto enrolment, this figure looks set to rise exponentially due to an increase in the number of pension savers and the typically low levels of awareness and engagement amongst this group.
Auto enrolment’s reliance on inertia or ‘doing nothing’ means that savers tend to have lower levels of awareness and engagement compared to those who made an active decision to start saving. As a result, there is a greater risk that they’ll lose track of their pension pots. It’s also very unlikely that many auto enrolled savers will initiate their own transfer.
So why are small pots a problem?For savers, having a large number of small pots can be difficult to keep track of and there’s a risk that they will be eaten up by charges. There is a lot of logic in having one big pot, as it has more opportunity to grow and there are more options when it comes to retirement. But, having access to the right advice to understand which provider is best to consolidate with isn’t always easy. For those that do decide to transfer, the process isn’t always simple.
For providers, having large numbers of small pots is uneconomic. The levels of administration involved with running a small pot are not dissimilar to a large one.
The increasing focus on value for money may draw trustees into action on small pots. Where there are explicit member administration charges then it is the leaver that is bearing the cost, and where there is just an overall scheme administration charge then all members are experiencing the drag caused by carrying a large number of small pots.
So what’s the solution?Whichever way you look at it, small pots is a big problem. Former pensions minister Steve Webb’s proposed solution to this problem was a “pot follows member” initiative whereby pension pots with less than £10,000 in them would have automatically moved to employees’ new scheme when they moved jobs. This initiative – whilst popular with savers – faced resistance from the industry due to the complexity and cost involved with implementing it and in 2015 the Conservative Government put in on the shelf.
The pensions dashboard may go some way to mitigating this issue yet there is no guarantee that the sort of people who change jobs frequently and leave small pots behind will raise their level of engagement and initiate transfers to tidy up the small pots they have left behind.
One potential solution is the improvement of member communications. Trustees who hold a number of small pots can increase communication and encourage more leavers to transfer to their new employer’s scheme.
Similarly, the trustees of the member’s new scheme may find that “best practice” becomes to alert members that their scheme accepts transfers in and make it easier for members to transfer. One of the lessons of the British Steel debacle is that many of the steelworkers who had decided to take a cash equivalent transfer value (CETV) ended up in expensive Sipps because they, and their advisers, were unaware that the new low cost British Steel DC workplace scheme accepted transfers in. It is always worth communicating this with employees.
The completion of master trust authorisation may also open up new avenues. For example, we might see two authorised master trusts undertake a “member exchange”, swapping small pots across where the other scheme has an account receiving current contributions. Under trust law, this could be on an assumed consent basis, with members simply being given an opportunity to opt out of the process.
And finally, zombie funds. In the same way that the life assurance consolidators have become adept at buying and administering closed books of life companies, they might want to buy the “back book” of non-contributing members from auto enrolment pension schemes.
Whatever the solution, it is clear that action needs to be taken by the multiple parties involved to ensure that the £400m and growing of unclaimed pension savings are not lost entirely.