Government consults on transfers and small pension pots

Introduction

On 15 December 2011, the DWP published plans aimed at ensuring that “money saved into a pension stays in a pension”.

With a view to supporting the commencement of automatic enrolment in 2012, the Government wants to address two of the key barriers to accumulating “big fat pension pots”: short service refunds from DC schemes and the complex pension transfer system.

In this Alert:

• Key points
• Background
• Short service refunds
• Small pension pots
• An aggregator scheme for small pots
• Pensions which move with people from job to job
• Next steps

Key points

• The ability to take a short service refund of contributions from a DC scheme will be abolished “at the earliest legislative opportunity”.
• The DWP is looking at options to address the proliferation of small pension pots, including consolidating pensions in one or more “aggregator” schemes or enabling them to move with people from job to job.

Background

Starting in 2012, employers will have a duty to automatically enrol “eligible jobholders” into a qualifying pension scheme.1 The Government hopes that, as a result, between five to eight million new pension scheme members will save into a workplace pension for the first time.

But given the backdrop of an increasingly mobile labour market, the Government expects the introduction of automatic enrolment to result in a significant increase in the number of small, dormant pension pots, with potentially up to 4.7 million by 2050. This is the driver behind the Government’s latest consultation.

Short service refunds

Currently, occupational DC scheme members can receive a refund of their pension contributions if they leave a scheme within two years of joining. Although a right to a transfer payment exists after three months’ membership, a contribution refund is often paid instead owing to member inertia.

Keen to maximise pension savings, the Government plans to abolish short service refunds for occupational DC schemes at the earliest opportunity. Subject to the Parliamentary timetable, this could be as soon as 2014.

Small pension pots

In a bid to avoid “poor outcomes for individuals and inefficiency for the pensions industry”, the Government wants to encourage individuals to consolidate their pension savings over their working lives, to reduce the risk of small pots becoming “lost” or “stranded”.

Three options are proposed:

• minor changes to the current system to make member initiated transfers easier and less expensive;
• a transfer system which allows easy consolidation of small, dormant pension pots into an “aggregator scheme”; and
• a system where small pension pots follow individuals from job to job.

The Government favours the second and third options, which it sees as being more likely to overcome the ongoing problems of individual inertia and lack of engagement with pensions.

An aggregator scheme for small pots

The idea of an aggregator scheme is that, when an individual leaves an employer and their pension pot is under a certain size, that pot would transfer by default to an aggregator scheme. Essentially, this would give scheme trustees a right to initiate the transfer.

An aggregator scheme would need to be willing to accept even the very smallest pots, with a simple transfer process to ensure that the default process is not overly burdensome for schemes. Low charges will also be key.

As part of the current consultation, the Government is considering whether NEST would be a suitable aggregator scheme.

Pensions which move with people from job to job

Viewed by the Government as the “most ambitious change to the way the pension system works”, this option would see an individual’s pension pot automatically follow them from job to job. The process would be designed to tie-in with the automatic enrolment obligations. So, for example, the transfer could be initiated by an individual’s new scheme only once active membership had begun and the deadline by which the individual needed to opt-out had elapsed.

For this system to work, the consultation acknowledges that the transfer would need to be carried out electronically and with the need for minimal involvement by employers and individuals.

Next steps

The consultation closes on 23 March 2012. The Government hopes to bring in the ban on contribution refunds from occupational DC schemes in 2014. But its ability to do so may well depend on the successful implementation of a solution for dealing with transfers of small pension pots.

1For more information, please see our Alert: “The Road to 2012: Final Preparations Underway” dated 22 July 2011