In the bad old days, a member of an occupational pension scheme could save for nearly five years and – if they left their employer – be entitled only to a return of their contribution. For the job-hopper things improved when schemes were required to introduce ‘two year vesting” in 1987 which ensured people got an entitlement to a deferred benefit so long as they survived 24 months in the scheme. A further improvement happened in 2014 when the practice of ramping up management fees on the pots of people who’d left service.
But plans for compulsory aggregation of small pots into one big pot – proposed in the 2015 pension bill have so far come to nothing and the result is ‘pot-proliferation”. If nothing is done about small pots stagnating within pension trusts and with insurers, the DWP estimate there will be 50m abandoned pots by 2050.
It’s good to see veteran journalist Stephanie Hawthorne reporting on progress towards finding a solution to this problem in Pension Expert.
Pension Expert’s chart shows that at pensions like NEST which are used almost exclusively in the workplace, deferred members exceed those active savers and this is not just bad news for members. The cost of housing small pots on the workplace pension platforms is large ‘fixed” and don’t vary according to the amount of money managed. While large pots can be very profitable to pension providers, small pots can be loss-making.
The Government would like to see pension pots become more accessible and the pensions dashboard should help people locate and aggregate their pots together. But by 2025, when the dashboard is going to be fully functional , some pots will have been damaged by charges to a point where there’ll be nothing to see there.
A £250 pot managed by now could be subject to fund charges of around £45 if invested in NOW’s pension fund , but it’s administration charge which is set at £1.50pm could cost the member a further £75 over the next five years meaning that nearly half of the current fund value could be paid to NOW – to keep it going.
NOW are well aware of the problem. Coupled with issues around net-pay currently they make NOW a bad place for low-earners withe minimum contributions and low expectations of continued employment.
NOW’s charging structure makes the issue transparent, but People’s Pension, Smart and NEST (which absorb the cost in their fund charge) are no less impacted. One way or another – the saver will end up paying unless something can be done.
What is to be done?
The prevailing wisdom is that it is too expensive to move member’s money around when the money involved is less than the cost of advice. £250 does not cover the cost of advising money to move so savers – even if they found their pension pot and understood the complexities of transferring, are unlikely to get much help from traditional financial advisors.
There are self invested personal pensions that offer a service. Profile Pensions offers to find your pension and charges you a fee for uniting them into their SIPP, Pension Bee do the same thing without a charge but neither are able to make money out of £250 pots.
What is needed is a bulk solution for small pots and NOW has been arguing for the opportunity to exchange large groups of inactive members with small pots with providers with whom the pot-owner are actively saving.
This looks like simple enough from a technology point of view, but it means people being transferred without consent and means regulators would have to be comfortable that the end justifies the means. The authorisation of master trusts brings this kind of solution one step closer (as if you follow the logic of authorisation, there’s no such thing as a bad authorised master trust).
Nevertheless, we are some way from the pot-follows-member vision of the 2015 pension act. In answer to the question at the top of this section, we need some political muscle and a policy initiative from the DWP.
Small pension pots are no good at all
Let’s face it, small pots cause problems that are going to get worse. Often, they aren’t delivering value to savers and when savers get value it’s at the expense of providers who will ultimately pass on costs to other savers.
We need efficiency in the system and that means that we need a policy initiative and providers who are prepared to be innovative.
That is not going to happen without a kick up the pants from someone Well done Stephanie for reminding us of the problem – let’s hope that the big mastertrusts can take a lead – and that Government can put our money where the value is.
Let’s see pots following members as part of the pensions dashboard initiative.