The DWP’s proposals for an auto- matic transfer system for small pension pots has been met by widespread criticism from a wide range of stakeholders. The CBI, NAPF, Labour Party and several pensions consultants have attacked the government’s ‘pot follows member’ plan, accusing it of risking transferring pots to poorer value schemes, increasing costs, introducing a short-termist approach to pensions and being unworkable.
The DWP has confirmed that pot follows member will be included in the forthcoming Pensions Bill. It has con- firmed a limit of £10,000 for small pots to be transferred and has extended the scope of the rules to include all pots, not just those arising from auto-enrolment, in a bid to halve the anticipated 50 million new small pots that would have been created by 2050. Legacy pots will not be included, however.
Initially transfers will only be for money purchase schemes. Defined benefit occupational pension schemes will not be included at this stage.
Pension scheme providers and administrators will operate the transfer but individuals will be given information and have the right to opt out. The DWP is working closely with industry to develop detailed options for how the process will work.
Minister for pensions Steve Webb says: “We want to make it the norm that when you move job, your pension rights can move with you if you wish. This will reduce the costs of provid- ing pensions and will help people to be much more engaged with their pension savings.”
The CBI has reiterated its opposi- tion to anything other than a virtual aggregator model. Neil Carberry, CBI director of employment and skills, says: “Businesses would have preferred a virtual aggregator to an automatic transfer system. This would have been easier to implement and avoided the risk of member detriment.
“The Government’s choice to opt for automatic transfers suggests a move away from guaranteed savings. These schemes need long-term membership in order to be viable.”
“We estimate that implementation of pot follows member could at least double our administration costs. On average, employees change jobs at least 11 times during their working lives. This can be much higher in transient industries such as construc- tion, hospitality and retail. The costs involved in building a transfer system that can handle the volume, speed and variation of processing pension transfers will be enormous.
“As a pension provider to transient workforces for the past 30 years, we have seen many members returning to us as they change employers. If auto- matic transfers were to take place, this could be at the member’s detriment. Pot follows member will ultimately put up charges in the short term.”
Richard Butcher, MD of Pitmans Trustees Ltd, believes the system simply won’t work. He says: “They have proposed two possible systems. The first involves a Pension Transfer Information Document (PTID). This is a sort of pension p45 that the individual will take to their new pension scheme, giving them all they need to effect a transfer. The problems with this are that often employers won’t know where to find their former employees and even if they do, it relies on the individual passing the PTID on. This is a huge paper trail with lots of places for the paper to get lost.
“The second involves a central electronic pot matching IT system. In principle, I can see how this will work, but the government hasn’t got a good record of delivering large IT systems like this. Aggregators would give us 80 per cent of the big fat pot benefits at 20 per cent of the costs of pot follows member.”
Labour shadow pensions min- ister Gregg McClymont says: “The Government is still getting it wrong. Ministers’ plans are vague and unconvincing and there’s still a big risk that savers’ pension pots can be transferred from good schemes into bad ones.” Morten Nilsson, CEO of Now: Pen- sions, has expressed concern over the decision to leave legacy pensions out of scope. He says: “It’s disappointing that members in legacy funds, many of which are far less cost efficient than some of the pension funds launched in the run-up to auto-enrolment, will not benefit from this and will continue to receive a poor deal.”
B&CE, which runs The People’s Pension, is the one provider that has managed to deal successfully with small pots for many years. It is concerned that the proposals could more than double its admin costs and wants a full cost benefit analysis to take place before any big decisions are made.
Jamie Fiveash, director of customer solutions at B&CE, says: “While we welcome any improvement in transfer efficiency in the pension industry, we would urge the DWP to undertake a full cost benefit analysis of pot follows member before proceeding too far down the line.