When people switch jobs, previous AE pensions should move with them, under proposals put forward by pension consultants LCP.
It is saying this ‘pot follow member’ approach — which LCP is calling ‘magnetic pensions’ — is a better solution to the small pots problem than the ‘pot for life’ proposals currently favoured by the government.
It is proposing that pensions would be ‘magnetically attached’ to an employee and move with them each time they switch jobs. LCP suggests these automatic transfers should stop once the amount accrued in a pension reaches a set level — ideally enough to provide a reasonable standard of living in retirement.
Under these proposals workers would be free to opt out of this process at any point if they wanted their pension pot to remain where it was.
LCP says this idea builds on the 2014 Pensions Act proposal for a ‘pot follows member’ solution, which was passed into legislation but never implemented.
The new proposal would also be supported by the infrastructure provided by the pensions dashboard programme, due to go live in the next few years. Dashboards provide a ready-made network of connections between pension schemes and a central system which could be readily harnessed for the purposes of delivering the ‘magnetic pensions’ proposal.
LCP points out that there are now an estimated 2m pension pots ‘left behind’ each year as a result of people changing jobs, many with relatively small sums invested. In total industry figures suggest there are now 16m small deferred pots worth less than £2,500.
The Government is considering a range of initiatives to tackle this problem including automatic consolidation of ‘micro’ pension pots (under £1,000) and more controversial ideas focused on giving ‘member choice’ in workplace pensions — known as the lifetime provider, or pot for life model which was as floated in the 2023 Autumn Statement. Under these proposals once a member has selected a pension this is ‘stapled’ to them when they switch jobs.
However LCP says there are serious problems with the government’s approach. These include:
- Increased cost of providing pensions, as new computer systems would be needed to consolidate micro pots and to facilitate member choice, with employers also paying more to send contributions to different schemes for each worker;
- A risk of members making poor choices as they may find it hard to compare multiple past pension providers and choose which one was the best. They would also be bombarded by marketing as providers competed for their business, further adding to the costs of providing pensions
- The risk that ordinary savers would be left behind if higher earners exercised member choice and moved their pension money elsewhere. The remaining workplace scheme would be less cost-effective for a pension provider which could hike charges in response, to the detriment of the remaining members
LCP head of DC pensions Laura Myers says: “We urgently need a solution to the problem of small pension pots but the Government’s plans are complex and expensive and will take years to implement. Worse still they may lead to worse outcomes for many ordinary pension savers.
“We are advocating a simpler and more cost-effective solution which keeps the best features of automatic enrolment, such as a single pension scheme in each workplace, but makes sure that people do not reach retirement with large numbers of small pension pots.
“We hope that the next government will think again about the current direction of policy and deliver a solution which pension savers will understand and which will deliver the best outcomes for people on average and lower incomes”.
Commenting on the report, Royal London’s director of policy and communications Jamie Jenkins adds: “This is an eminently sensible proposal which would be easily understood by savers as they move from job to job, bringing their small pension pots with them.
“While it might not have been the right time to implement this during the phasing of automatic enrolment, ‘pot follows member’ should now be revisited, having identified the serious challenges with other proposals.”