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.
I don’t see why lack of consent should be a problem for most. People were mainly put into a scheme without consent and then a 2nd, 3rd etc without consent. I can see there being an issue with gpps as contracts formed with the individual but is there anything really stopping say NOW trustees and smart trustees for example coming to an arrangement? On the contract based side, would a clause stating provider has right to transfer pot to another ae compliant provider if contributions cease?
Problem is the small pension pot rule. Three pots of sub £10,000 can be a tactical move by people close to the Lifetime allowance. Transfer without consent can only happen if the Lifetime allowance is removed.
I think there is a simpler way than compulsion and the previous idea of “pot follows member”. How about if every time someone leaves an employer the Master trust scheme must issue a compulsory “leaver’s options” document? It would contain the following information:- “You have two options – 1) to leave your money with us and if you wish to do this then you need take no action. However, we will continue to charge you for leaving your money with us. If you remain in the scheme, this is the current value of your pot, this is the estimated annual reduction in the value of your pot caused by charges, and this is the annual percentage rate of investment growth needed to cover these charges and maintain the true value of your pot taking into account inflation”. If your pot does not grow at all, the pot would reach zero value after X years if you do not transfer. 2. “You can transfer the money in your pension scheme to your new workplace scheme, or another registered pensions scheme. We will not charge you a fee to transfer your pot to the new scheme (Note to Henry, new Qualifying Workplace Pension Schemes are not allowed to charge transfer out penalties or charges), and before you decide whether or not you wish to transfer away from us, you may wish to compare the cost of leaving your pension pot with us with the charges made for the new pension company to manage your pot. Also find out from them if there are any initial fees or charges made by the new pension company, as these charges may make such a transfer less attractive (Note to Henry, Qualifying Workplace Pension Schemes do not to my knowledge levy any transfer in or set up charges). If you do wish to transfer your pension to the new workplace pension scheme then this can be done using a pension transfer form/online transfer form obtained from your new pension plan provider”. Given that there is NO REQUIREMENT TO TAKE FINANCIAL ADVICE for moving away from and into defined contribution Qualifying Workplace Pension Schemes, it cannot be beyond the wit of man to invent a standard transfer process permitting such transfers using an industry wide automated transfer form with a paper document alternative for those without access to technology. If such an option and simplified universal transfer process were available, there then needs to be some responsibility shown by members of workplace pension schemes. If this process were made available, there really can then be no excuse for member ignorance.