Automatic pension transfers may be too much so soon after auto-enrolment, says expert

The Government recently announced its plans (48-page / 950KB PDF) to allow workers to take small pension pots from job to job. But has it properly considered the impact this will have on employers?

On its own this would not be too much to expect, but companies are about to have to grapple with auto-enrolment, a potentially costly and admin-heavy process that will compel companies to pay into pensions for their workers.

All of this represents yet more red tape for employers, many of whom are only just getting their heads round the main auto-enrolment process. Automatic transfers are likely to involve employers taking responsibility for a number of tasks: information requirements, updating and checking databases and implementing transfers.

It has not been decided exactly how the scheme will work. It will not affect defined benefit pension rights and legacy pots created before auto-enrolment. Pension scheme members will have the right to opt out of the transfers, while pots over £10,000 are likely to transfer only if the member opts in.

So what is likely to be expected of employers? The Government has not yet decided on the process. As part of its consultation, however, a likely scenario emerged.

When a worker leaves employment, the original employer (or the pension scheme trustees/managers) uploads information about him and his pensions pot onto a central database.

Once the new employer has automatically enrolled the worker into his scheme, it checks the database for details of the worker's previous scheme. The new employer informs the worker that his pot in his previous scheme will be transferred to his new employer's scheme unless he opts out. Unless the worker opts out, the new employer arranges with the old employer for the pot to be transferred

It is unclear who will be responsible for setting up the central database.

Providers of personal pension schemes may be able to recoup some of these costs from workers' pots as part of the process, but employers will need to bear their own additional compliance costs. Unless the Government introduces overriding legislation, employers will also have to amend scheme rules to allow automatic transfers – amendments on top of those already required to deal with auto-enrolment.

Automatic enrolment will undoubtedly assist with reducing the number of small pots. However, the Government will need to ensure that the final process is simple and practicable. A delay in the implementation of automatic transfers to allow employers first to get to grips with automatic enrolment would certainly ease the process for employers.

Simon Tyler is an expert in pensions law at Pinsent Masons, the law firm behind Out-Law.com