Small pension pots will automatically transfer when workers change job, Government confirms

Out-Law News | 24 Apr 2013 | 1:01 pm | 3 min. read

Pension savers will be able to automatically take small pension pots with them when they change job under new plans announced by the Government.

It has confirmed that a "pot follows member" automatic transfer mechanism (25-page / 387KB PDF) will be included in the forthcoming Pensions Bill.

Pensions Minister Steve Webb said that the plans could reduce the proportion of people reaching retirement with five or more dormant pension pots as a result of changing jobs from a quarter to one in 30.

"We want to make it the norm that when you move job your pension rights can move with you if you wish," he said. "This will reduce the costs of providing pensions and will help people to be much more engaged with their savings."

The legislation will also abolish short-service refunds, where pension contributions are repaid to employees who leave their role before they become entitled to any rights under a pension scheme. This will apply to savers who leave a trust-based money purchase scheme within two years, and will come into force following Royal Assent of the Pensions Bill.

Earlier this month, charity Age UK said that nearly a quarter of working adults had lost track of at least one small pension pot, usually because they had moved jobs too many times to keep track. The Department for Work and Pensions (DWP) has estimated that people have an average of 11 jobs over the course of their working lives, a statistic which it said would result in around 50 million dormant pension pots by 2050 without action.

The number of small pension pots workers will accumulate as they move between jobs will increase under the Government's programme of automatic enrolment, the DWP said. This will see most workers enrolled in a workplace pension scheme by 2018.

Under the plans, any pension pots worth less than £10,000 accrued over a person's working life will automatically move with that person when he or she changes job. Initially, only those savings accrued under money purchase, or defined contribution (DC), schemes will transfer automatically. Pension rights under defined benefit (DB) schemes will not be included at this stage, due to the complexity of these products. Pension scheme providers and administrators will operate the transfer, and individuals will be able to opt out of the process if they wish.

A pension pot will be eligible for automatic transfer as long as it was created after a certain date. It will be eligible either once all contributions have ceased and the individual has left employment, or once all contributions have ceased for a prescribed period of time. Regulations, to be published at a later date, will specify what information should be given to the pension scheme member and by whom, so that the member is properly informed about the nature of the transfer process and the effects that it may have on their benefits.

The Pensions Regulator will be the main enforcement body for the automatic transfer process, the Government said. It will align its approach to regulation with its overall regulatory framework for DC schemes, which is currently under consultation. Details of the requirements, and penalties for breaches, will be set out in future regulations.

Pensions expert Simon Tyler said that although the plans would "undoubtedly assist with reducing the number of small pots", the Government must ensure that the final process is "simple and practicable". However, he welcomed the DWP's promise to minimise any additional burdens on employers, as outlined in its paper.

"This is a welcome development, as the process outlined in the July 2012 consultation paper imposed considerable additional obligations on employers," he said.

"There is still a lot of detail to be worked out. A central data-matching process would be complex, but the simpler alternative outlined in the paper relies on employees themselves passing on information to their new employers on recruitment," he said.

However, reaction to the paper by the pensions industry was mixed. Although the plans were welcomed by some pension providers, industry body the National Association of Pension Funds (NAPF) said that the approach "could put workers' savings at risk" if they were automatically transferred "from an excellent pension into a bad one with high charges".

Pensions expert Simon Tyler said that the question of "what quality standards" would apply to a scheme in order for it to be eligible to receive an automatic transfer was "critical".

"The Government will need to ensure that members do not suffer by being automatically transferred to poor-quality schemes, but can't be overly prescriptive if this unduly restricts the number of transfers," he said.