Recently the Department for Work and Pensions (DWP) issued a new consultation – Ending the proliferation of deferred small pension pots – which looks to address the growth of deferred small pots.
Wherever this eventually lands, there is no doubt that a solution is needed and quickly. With increased job mobility, the number of deferred pots will keep increasing, and with it the chance of people losing track of these savings.
But the issue of deferred pension pots goes beyond just small pots of under £1,000.. While obviously the smallest pots are – arguably – easier to lose track of and more quickly eroded by fees, in an age of auto-enrolment coupled with increased job mobility, people will end up with multiple pots over the years – many of which are likely to hold more than £1,000.
Our latest research indicates that despite 33 per cent of employees wanting all their pots in one place, and 25 per cent admitting that they have lost track of at least one of their pots, the vast majority have never transferred one pension to another.
With employees claiming it’s often a too much hassle, too time consuming or too difficult, the Government needs to push providers to simplify the transfer process for all pots, regardless of size. And there are several ways that this can be done.
Firstly, the Government needs to force providers to simplify the transfer process. From personal experience, I have been trying to transfer a pension pot from a provider for months and I keep hitting a requirement to print and post the necessary paperwork, rather than completing it digitally. In a world where the need for printers has significantly diminished, and is not necessarily a tool at everyone’s disposal, this constitutes an unreasonable barrier.
There must be more digitisation and less paperwork in pensions, and the Government could push this through via regulatory requirements. Innovative technology, such as mobile phone apps could make the transfer process a lot quicker for members, and
reduce friction.
It’s also important to consider that when employers change pension providers, the original existing pension pot in some cases can’t be automatically transferred, meaning the existing pot remains with the previous pension provider, adding to the proliferation problem. A solution would be for Government to facilitate automatic transfers in case of a provider change.
In the consultation response, pensions minister Laura Trott said the longer-term solution could be to move to a “pot-for-life” system where members essentially take their pension pot with them from one employer to the next. It certainly would help tackle the issue of proliferation and lost pots.
However, if the workplace pension system did evolve to this, it could leave employers with an administrative nightmare of potentially having to pay into hundreds or thousands of separate pots with several different pension providers.
An important part of the proposed multiple consolidator model is the introduction of a clearing house. This would also be essential if the “pot-for-life” framework ever comes to fruition. It would allow employers to pay just one amount, as they do now, to one place and it would then be up to the clearing house to distribute the accumulated money to the different providers.
While such a solution may prove to be effective, it doesn’t deal with the root cause of the issue, which is a lack of member engagement with pensions.
When people aren’t engaged with their pensions, they lose sight of how many pots they have and how or why they can transfer and combine their pensions. A lack of understanding is increasing the risk of lost pots. But it’s also preventing people from building up an adequate pension for retirement. Engaged members are more likely to make good decisions and boost pensions contributions – for disengaged
members the reverse is true. The solution is getting people engaged so they don’t abandon their pension pots.
As long as a “pot-for-life” model remains on the drawing board we need to accept that inertia and complexity will remain big parts of the problem. We must ensure that the transfer process becomes easier and simpler, regardless of pot size, and we need to get people more engaged with their pensions.
