Automatic Transfers for DC Pension Pots

Introduction

The introduction of automatic enrolment is expected to lead to the proliferation of dormant, often small, DC pension pots. The Government intends to address this with a system of automatic transfers to a new employer’s scheme.1 It has now published a Command Paper providing more detail on its proposals

Key Points

The Government intends to put in place an automatic transfer system for certain members of workplace pension schemes.
Initially, DC pension pots of up to £10,000 will be eligible for automatic transfer.
The Government is considering ways of identifying dormant pots which are eligible for transfer.
People who wish to transfer their pots voluntarily will still be able to do so.
Short service refunds from DC occupational pension schemes will be withdrawn in 2014.

Background

Having considered several options2 for dealing with the expected increase in small pots, the Government’s preferred approach 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.

Eligibility for Automatic Transfer

Transferring and receiving schemes

Initially, automatic transfers will only take place in respect of “pure” DC benefits, i.e. benefits calculated solely by reference to the assets held in the fund (in line with the revised definition of “money purchase benefits” to be introduced into the Pension Schemes Act 19933).

There will be a formal consultation on regulations setting standards for automatic transfer schemes (“ATSs”).

Eligible individuals

So that as many people as possible may “benefit” from the new process, it will apply, at the outset, in respect of any person who is a “worker”4 and an active member of a workplace pension scheme. (This goes beyond the Government’s original intention of confining automatic transfers to pots created in automatic enrolment schemes).

Eligible pots

A pot will be eligible for automatic transfer once all contributions have ceased, as long as it was created after a certain date (to be specified in regulations). This may be coupled with a requirement that the member is no longer working for the employer.

The Government intends to retain flexibility in relation to all the above areas so that it can broaden or narrow requirements, as appropriate, in the light of experience or further input from interested parties.

Pot Size

On balance, the Government considers that a pot size limit of £10,000 for automatic transfers is appropriate to achieve its aims of:

sufficient consolidation to encourage individual engagement with pension saving and enabling people to plan for retirement; and
ensuring individuals will be able to purchase an annuity on the open market at a competitive rate.

The Government estimates that the £10,000 limit will lead to a 50% reduction in the number of dormant pots and administrative savings totalling £6.4 billion by 2050.5 The Secretary of State will be required to review this limit at least every five years and revise it if appropriate.

Automatic Transfer Process

The Government proposes that the transfer process would involve the following stages:

the transferring scheme (“TS”) becomes aware that a member’s pot is potentially eligible for transfer;
the TS would be required to issue specified information about the pot, making it possible for the pot to be identified and for a transfer request to be made in respect of it;
either on becoming a member, or at regular intervals, the ATS is required to search for information about the member’s dormant pot(s);
if a pot is eligible to be transferred, the member is informed that the dormant pot would be transferred to the ATS unless he or she opts out. There will be a requirement to provide the member with prescribed information about the effect of automatic transfers and their right to opt-out;
if the member does not opt-out within a prescribed period, the ATS requests that the TS transfer the pot;
the TS makes the transfer. On completion there will be a statutory discharge for the TS: it will have no further obligation to provide pension benefits to that member.

There are two options under consideration for initiating the transfer process:

a pot-matching IT system – a central system to which TSs would upload information on pots which are eligible for automatic transfer. ATSs would need to check the system in respect of new joiners and begin the transfer process when an eligible pot is located; or
a “member driven” approach – when a member leaves their employer they would receive a “Pension Information Document” relating to their pot in the employer’s scheme which they would pass to their new employer. This might work in a similar way to a P45.

The Government is inclined towards a periodic approach. This would mean automatic transfers would take place in bulk, at regular intervals (to be specified in regulations and kept under review). The alternative, under which a member would initiate a transfer on starting work with a new employer, has not yet been ruled out. The Government intends to explore the options further before deciding which to pursue.

Compliance

TPR will be the main enforcement body for the automatic transfer process. The approach to regulation will be aligned with TPR’s overall regulatory approach for DC schemes (currently under consultation6) with whistle blowing by individuals and those administering pension schemes being one method of detecting breaches.

Next Steps

The framework for automatic transfers will be created in the forthcoming Pensions Bill, with full details to be set out in regulations. These regulations will be subject to formal consultation after the Bill has received Royal Assent.

1 Please see our Alert: “Improving transfers and dealing with small pension pots” dated 26 July 2012
2 Please see our Alert: “Government consults on transfers and small pension pots” dated 19 December 2011
3 Please see our Alert: “Better late than never? The Pensions Act 2011” dated 3 November 2011
4 Please see our Alert: “Automatic enrolment – who is a worker?” dated 7 February 2013
5 In net present value terms
6 Please see our Alert: “TPR ‘sets the standard’ for DC schemes” dated 16 February 2013