AJ Bell : DWP could revive ‘pot follows member’ in bid to tackle £27 billion lost pensions challenge

DWP could revive 'pot follows member' in bid to tackle £27 billion lost pensions challenge

Tom Selby

30 January 2023

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AJ Bell press comment - 30 January 2023

• The Government is considering introducing automated transfers for small 'deferred' workplace pension pots in its latest attempt to address the growing problem of lost retirement pots (Addressing the challenge of deferred small pots: a call for evidence - GOV.UK (www.gov.uk))
• The DWP is also canvassing views on whether large default consolidators will have a role to play in hoovering up low value pensions
• Research suggests the value of lost pensions has grown from £19.4 billion in 2018 to £26.6 billion in 2022 (2022-10-27 Briefing Note 134 - Lost Pensions 2022: What's the scale and impact? | Pensions Policy Institute)
• In addition, the Government is seeking to bolster value-for-money in workplace pensions and better understand member engagement
• Policymakers will need to determine the size of a 'small' pension that could see an automatic transfer happen and how to ensure members do not lose out as a result
• Small pots call-for-evidence comes alongside efforts to create 'pensions dashboards', which will eventually allow people to see all their retirement pots in one place, online

Tom Selby, head of retirement policy at AJ Bell, comments:

"The success of automatic enrolment has brought with it a significant challenge - the rapid growth of small, deferred pension pots. The latest data suggests lost pensions were worth £26.6 billion in 2022, with much of this growth likely linked to auto-enrolment and people switching jobs.

"According to some estimates, the average person can have up to 11 different employers during their career, potentially building up a different retirement pot each time.

"Having lots of small retirement pots scattered all over the place creates a number of challenges, both for the member and for the firms administrating those pots.

"For individuals, managing multiple small pensions across different providers makes them difficult to track. For workplace schemes, small pots can be costly to administer, potentially weighing down on the ability of these schemes to improve administration or reduce charges.

"A system of auto-transfers for small pots could help tackle these problems, but it would also raise a whole host of new challenges. What happens, for example, if someone is automatically moved from a low charging scheme to a high charging scheme? Or from a scheme where investment performance is good to one where performance is poor?

"There are also policies with valuable guarantees attached which risk being lost on transfer, although these generally exist outside of the automatic enrolment landscape.

"Addressing these challenges will be critical if any system of auto-transfers for small pots is going to get off the ground."

Value for money

"There are now millions of people in workplace pension schemes, including many with multiple pots from previous jobs. As things stand, it can be difficult for people to compare the performance of those pensions, and often people are nervous or fearful of engaging with their retirement fund.

"Introducing a common approach to disclosing performance would at least make it a bit easier for people make comparisons and understand what they're really getting from their workplace pension. Pensions dashboards have the potential to help in this regard too, particularly if they are developed to allow users to clearly assess costs, charges and performance. As the first phase of dashboards reaches implementation, now is the time for the DWP to clearly set out what future phases of the dashboard will look like and whether they will allow users to assess costs, charges and performance in particular.

"When it comes to consolidation beyond small pots, there are significant incentives for people to do this themselves, including the ability to lower charges, improve choice and generally make their lives easier.

"All of this can be achieved easily today - you just need to give your pension details to your chosen, low-cost platform and they'll do the legwork for you."

Tom Selby Head of Retirement Policy

Tom Selby is a multi-award-winning former financial journalist, specialising in pensions and retirement issues. He spent almost six years at a leading adviser trade magazine, initially as Pensions Reporter before becoming Head of News in 2014. Tom joined AJ Bell as Senior Analyst in April 2016. He has a degree in Economics from Newcastle University.

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