Hargreaves head of pension policy Tom McPhail and Aviva head of policy John Lawson are urging the Department for Work and Pensions to drop the pot-follows-member approach which many industry professionals see as expensive, complex and open to fraud.
McPhail and Lawson argue that the solution means providers would be incentivised to deliver good pensions and the technology is currently available to support this approach.
The ‘one member, one pot’ approach proposes a centralised database with pull style transfers, and a ‘pensions P45’ that would not involve any physical transfers of money.
A provision has been included in the Pensions Bill to enable the Government to create an automatic transfer system. It is currently planned that any pension pots of less than £10,000 left behind when someone changes jobs would be automatically transferred to their new employer’s pension.
Lawson says: “Under the ‘one member, one pot’ approach an employee would inform their new employer of their pension account reference number and the name of their provider/scheme. This information could be added to an employee’s P45 form containing income, tax and NI deductions from their previous employment. Employees without a pre-existing account, for example those new into the workforce or reaching the automatic enrolment trigger age of 22 years, could be auto-enrolled into the employer’s scheme.
“An approach that allows an employee’s pension pot to stay with them in the truest sense, without the risk and cost of transferring money to a new scheme is worthy of consideration – before legislation is passed.
“Although employers would need to pay into multiple pension schemes/providers for each of their employees, this would not create the same administrative burden as it would have in the past. Automatic enrolment software developed to assist employers assess their workforce is now capable of facilitating employer payments to multiple schemes without creating any additional payroll administration.”
McPhail says: “There are a number of challenging issues with the models currently being proposed as part of ‘pot follows member’, and ‘one member, one pot’ could provide the answer.
“This idea of arbitrarily moving people’s pension saving whenever they change jobs is contrary to everything we know about behavioural economics.
“If you want to encourage someone to become comfortable and engaged with their retirement planning, the last thing you want to do is change their pension every time they change jobs – how can you possibly expect them to take an interest in their pension under these circumstances?
“Pension liberation fraudsters could use automatic transfer under the current proposals for ‘pot follows member’ to facilitate syphoning money out of the pensions system. By contrast, if the default is that the money doesn’t move unless the member actively chooses to transfer it to their new employer’s scheme then the risks are substantially reduced.”