Improving governance and best practice in workplace pensions - Work and Pensions Committee Contents

7   Small pots and "pot follows member"

116.  This chapter assesses how the Government's plans to deal with small pension pots can be implemented in a way which minimises the potential for consumer detriment.

The small pension pots problem

117.  The UK currently has a significant problem with the number of small pension pots accrued by employees in occupational schemes. An individual who changes jobs several times in their working life, as increasingly is the norm, and who joins a new scheme with each new job, can easily end up with many small pots. Employees can transfer small pension pots into a new employer's scheme when they take up a job, but this is often complicated and expensive.[131]

118.  The Government has recognised that this is a problem that is likely to grow as auto-enrolment is implemented. It has estimated that, under the current arrangements, there would be around 50 million dormant workplace DC pension pots within the system by 2050, and that over 12 million of these would be under £2,000.[132] The Government consulted in 2012 on what to do regarding small pension pots and offered three options:

  • Improve the current regulatory framework to make transfers easier and less expensive
  • Introduce an aggregator system, whereby small pots are automatically transferred to an aggregator scheme when an employee moves to a new job.
  • Introduce a system where pots follow employees from job to job, transferring automatically into each new scheme that the employee joins ("pot follows member").[133]

The Government's proposed solution to the small pots problem

119.  In July 2012, the Government published its response to this consultation exercise which stated that it favoured the third option, pot follows member.[134] The DWP believed that its research showed that a pot follows member approach would be less expensive for members in the long run, easier to administer and would avoid the potential for market distortion that an aggregator pot might create. It explained that research showed that:

Under automatic transfers to the new employer's scheme, providers would see a cost of processing in the early years after go live, but over time this will be outweighed by the savings they make from having to administer fewer and fewer dormant pots. Savings could start to materialise about six or seven years after the start of automatic transfers. A higher pot size limit will result in greater consolidation and larger long-run savings. [135]

The ABI consumer survey

120.  In the Government's response to the consultation on small pots, it cites an ABI consumer survey in support of a claim that consumers prefer the pot follows member approach:

[...] new consumer research from the Association of British Insurers with individuals showed that 58 per cent of respondents wanted their pot to move with them as they move employment, compared to just 10 per cent wanting their pot to automatically move to a central scheme, with a new pot started by the new employer.[136]

121.  The survey asked respondents the following question: "Each time you switch jobs, your new employer may start contributing into a pension pot separate to your old one. Do you think that the old pot should…?"

  • follow you automatically to the new job, without any input needed from you (58%)
  • automatically move to a central scheme, and a new pot started with your new employer (10%)
  • remain where it is, and it is completely up to you to move your pension pot(s) (15%)
  • instead be visible with all your other pension pots at a central place online (17%)[137]

122.  The TUC raised concerns about whether the survey results could be taken as a true representation of consumers' views as it did not provide respondents with any information regarding the risks and costs associated with each method. It said that it doubted whether:

[...] individual pension consumers currently understand the nature of defined contribution provision in enough depth to offer a plausible account of their preferences in response to such surveys. "Pot follows member" clearly has a logical appeal—but we do not believe that most consumers would support this approach if its inherent risks were explained to them.[138]

The potential for consumer detriment

123.  Stakeholders have raised concerns that the pot follows member approach might create the potential for consumer detriment. The NAPF made the following points:

What concerns us, and we are not alone in this—the TUC, Which? and Age UK share our view—is that when somebody transfers from one scheme to another, or when they move their job, their new employer scheme may be a scheme that has a lower annual management charge than their previous employer scheme, but it may not. At the moment, that is a big lottery for the individual, and they have very little choice.[139]

The TUC also argued that pot follows member is not the right approach, pointing out that pension schemes deemed suitable for auto-enrolment, a policy designed for new pension savers, might not necessarily be suitable for automatic transfers which will affect those who already have some pension savings.[140] TPAS was especially concerned about automatic transfers applying to pots with built-in guarantees (of annuity rates or investment growth rates) which might be lost during an automatic transfer. It recommended that pots with built-in guarantees should be excluded if the Government institutes pot follows member.[141]

124.  Age UK argued that if pot follows member was pursued, minimum standards in relation to charges, governance, default options and member communications must apply to all schemes which accepted automatic transfers. Age UK also believed it was important that minimum standards apply to "the processes and help available to people at the point of drawing the pension income" in those schemes.[142]

125.  The Minister responded to these concerns by pledging to improve the overall quality of schemes:

The consumer groups have raised a crucial issue and they are right: you cannot just have pot follows member into any old rubbish. The letter that the TUC and NAPF and Age UK and Which? sent said, "We are worried that you are going to auto-transfer somebody's pot from a 'good' scheme to a 'bad' scheme and there will be consumer detriment." I said to them, "What are we doing letting people be auto-enrolled into 'bad' schemes?" The problem is not £2,000 being moved from a good scheme to a bad scheme; it is an entire workforce in the new company in a bad pension scheme. We have to address that. Once we have addressed that, the objections to pot follows member not only disappear but, I think, actually becomes a very strong case.[143]

126.  We welcome the Government's attempts to tackle the problem of small pension pots. However we remain concerned about the potential for this system to result in consumer detriment for some individuals. While we agree with the Government that people should not be auto-enrolled into poor quality schemes, it remains the case that people may be transferred from a scheme with low charges and good governance into a scheme with high charges and poor governance. If the introduction of "pot follows member" remains the Government's preference, it must ensure, through stringent regulation, that all auto-enrolment schemes benefit from good governance and are free from high charges, including deferred member charges and member-borne consultancy charges.

Automatic transfers and the NEST restrictions

127.  As we have indicated, the National Employment Savings Trust (NEST) is a national pension saving scheme set up with a loan from the Government as part of the arrangements for the introduction of automatic enrolment. NEST has a public service obligation (PSO) to be available to all employers who wish to use the scheme to meet their auto-enrolment requirements and to accept all individuals automatically enrolled into it. In recognition of this, NEST was established with public money and continues to receive loans and grant funding from DWP.

128.  In addition to the PSO, the Government has placed a number of restrictions on NEST's operations. These include a ban on transfers in and out of NEST. In our 2012 report on automatic enrolment and NEST, we recommended that this restriction (as well as one capping annual contributions to NEST) be lifted "as a matter of urgency". Our concern was that the ban on transfers would prevent individuals from consolidating their separate pension pots, either into their NEST scheme or another pension scheme.

129.  The Government made clear in evidence to this inquiry that it intends to "fix" the issue of the ban on transfers in and out of NEST in order to implement its pot follows member solution.[144] It launched a consultation on the restrictions in November 2012. The consultation ended in January 2013.

130.  We published a separate report on the NEST restrictions in February 2013.[145] Our very strong view, based on the original assessment in our 2012 report on automatic enrolment, and on the further clear evidence which has emerged as the implementation of automatic enrolment has begun, was that the ban on transfers (and the contributions cap) should be lifted now, and should not be delayed until 2017. We are awaiting the Government's response to its consultation exercise and to our report.

131   Eighth Report, HC (2010-12)1494, paras 161-166. Back

132   DWP, Government response to the consultation on Improving transfers and dealing with small pension pots, July 2012, Cm 8402, Executive Summary, p 10. Back

133   DWP, Meeting future workplace pension challenges: improving transfers and dealing with small pension pots, December 2011, Cm 8184. Back

134   Department for Work and Pensions, Government response to the consultation, Improving transfers and dealing with small pension pots, July 2012, p 11. Back

135   Department for Work and Pensions, Government response to the consultation: Improving transfers and dealing with small pension pots, July 2012, p 13. Back

136   Department for Work and Pensions, Government response to the consultation: Improving transfers and dealing with small pension pots, July 2012, p 11. Back

137   Association of British Insurers, ABI Quarterly Consumer Survey 2012 Q2, July 2012, p 11. Back

138   Ev 235 Back

139   Q 101 [NAPF] Back

140   Ev 234 Back

141   Ev 204 Back

142   Q 259 Back

143   Q 383 Back

144   Q 385 Back

145   Fourth Report of Session 2012-13, Lifting the Restrictions on NEST, HC 950. Back

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Prepared 25 April 2013