Improving transfers and dealing with small pension pots

Introduction

The Government expects the introduction of automatic enrolment to lead to the proliferation of dormant DC pension pots. With this in mind, on 15 December 2011, the DWP issued a consultation seeking views on proposals to improve transfers and deal with small pension pots.1 It has now published its responseto consultation.

Key points

The Government’s preferred option for dealing with small pots is a system of automatic transfers to the new employer’s scheme.
Due to concerns about implementation, the new system will only apply to pots created in automatic enrolment schemes.
The DWP and a new pensions industry working group will look into the potential for more immediate improvements to the current voluntary transfer framework.
DC short service refunds will be abolished at the “earliest legislative opportunity”, but the Government will explore continuing to allow “micro-pot” refunds.

The proposals

The consultation set out three options for reducing the number of small pots:

improvements to the current regulatory framework to help make member initiated transfers easier and less expensive;
a transfer system where small, dormant pension pots can be consolidated into one or more aggregator schemes; or
a transfer system where small pots move to the new employer’s scheme when the individual changes job.

Alongside these proposals, the Government announced plans to abolish short service refunds for occupational DC schemes at the earliest opportunity.

The outcome

On balance, the Government’s preferred approach for dealing with small pots is a system of automatic transfers to the new employer’s scheme. In its opinion, such a system would allow members to build up one substantive DC account, while providers would benefit from having to administer fewer dormant pots.
Although it hopes to “achieve change in this area as soon as practicable”, the Government now wants to investigate how such a system might work and develop more detailed proposals. Among other issues, it intends to address:

consumer detriment;
potential costs to the industry, employers and government; and
questions about how the system might work where people have multiple jobs or gaps in employment.

Following concerns about the timing and practical challenges of implementing this new system:

it will only apply to pots created in automatic enrolment schemes;
the automatic transfer process will be unadvised business2; and
there will be a provision for a member opt-out.

In addition, the DWP will work alongside a pensions industry working group to explore the scope for more immediate improvements to the current voluntary transfer framework.

Potential alternatives

Some respondents to the consultation proposed a “virtual amalgamation tool” through which an individual could see all of their pension pots in one place. The Government considers this idea has potential as an addition to its automatic transfer system and intends to look into it further.

Short service refunds

The Government remains committed to abolishing short service refunds at the earliest opportunity, but notes that there “is a case for allowing refunds of pots that are so tiny that they would not be worth transferring”. It therefore proposes to consider whether to continue to allow schemes to refund “micro-pots”, and has started gathering evidence from the pensions industry and employer representatives.

New legislation

While the further work outlined above is undertaken, Steve Webb, the Pensions Minister, plans to bring forward the necessary primary legislation to allow automatic transfers to take place, to abolish short-service refunds, and to enable an alternative mechanism for refunding micro pots.
However, it is likely that the finer detail will follow at a much later date.

1 Please see our Alert: “Government consults on transfers and small pension pots” dated 19 December 2011
2 In other words, there will not be a requirement for financial advice before the transfer