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Pensions consumer groups unite in concern at Pensions Minister's small pots approach
Age UK, the TUC and Which? have issued a joint statement saying that they are 'extremely concerned' by the approach to dealing with pension small pots in the government's consultation response published yesterday (Tuesday).
Pensions Minister Steve Webb is backing a 'pot follows member' solution that will see small pension pots automatically follow a member from job to job, moving from the previous employer's scheme to that run by their new employer.
But the consumer groups warn that there is a risk of consumer detriment if the new employer's pension scheme is worse than the old one. They also believe that there are practical issues as not every employee moves in an orderly way from job to job.
Instead the groups favour the alternative 'aggregator' approach where small pots could only be automatically transferred to a limited number of high quality pension scheme which would guaranteed low charges, good governance and economies of scale.
The full text of the statement is below.
TUC General Secretary Brendan Barber said: 'This is a very disappointing consultation response, especially as the minister has a good record in taking forward the wide consensus for auto-enrolment established by the Pensions Commission.
'At the heart of the new auto-enrolment approach to pensions is meant to be a system that uses inertia to deliver a good outcome. But 'pot follows member' is not just an administrative nightmare but takes us back to a discredited buyer beware market model.'
Richard Lloyd, executive director of Which? said: 'One of the most important things people need to do is save for their retirement and government policy needs to make sure that every penny counts. That's why we're disappointed at the government's wish to adopt a 'pot follows member' approach which could mean people end up in poor value schemes which have a detrimental effect years down the line.
'The government now needs to make sure that all eligible schemes are of a high quality and that consumers will be protected from excessive transfer fees.'
Michelle Mitchell, Charity Director General at Age UK said: 'We know the difficulties that can face savers who have accumulated a number of small pension pots and we are disappointed with the government's suggested approach.
'Auto-enrolment means that the vast majority of employees will have the right to join a private pension scheme with a contribution from their employer, giving them a better chance of securing a decent retirement income but we don't believe that a 'pot follows member' approach will work well for those who move jobs often, who need to take career breaks or hold more than one job - the very people most at risk of having a poor retirement income.
'Pensioner poverty is still a very real problem in today's society and to break the cycle we must ensure that future retirees get off to the best start when saving for their future.'
The full joint statement reads:
'We are extremely concerned that 'pot follows member' has become the government's favoured approach to dealing with the small pension pots issue. In our view there are real risks of both consumer detriment and knock-on effects that could seriously hinder the success of automatic enrolment and the Pensions Commission's blueprint for reform.
We strongly welcome the government's commitment to dealing with small pension pots, and can see the attraction of 'pot follows member' as the simplest way of building 'one big pot'. But it seems unlikely that 'pot follows member' can be made to work without a radical transformation of the pensions system.
The conditions for becoming a qualifying scheme for auto-enrolment are fairly relaxed. Although there may be good reason for this, it allows for significant variations in scheme quality and expense. Crucially, the qualifying scheme conditions were not set with an understanding that schemes could also be used for auto-transfers.
A default transfer system based on pot follows member could see savings taken from a good scheme and invested into a less good scheme. By this we mean a scheme with higher charges, poor governance and/or a default investment strategy unsuitable for the mass of members.
Practical difficulties and cost
A 'pot follows member' approach raises significant practical difficulties. Not everyone moves in an orderly manner from job to job, choosing to save in a pension in each. The difficulties of dealing with people who move jobs frequently, hold multiple jobs, take career breaks, face unemployment and/or drop in and out of pensions saving are severe.
We think it is unfair to expect employers to deal with the complexities of contacting the previous employers of new staff to see if they have a pot to transfer, or for employers to search for possible new employers of former staff with whom they may no longer have any contact. Even if a central database were established to smooth the transfer of pension pots between different workplace schemes, there would remain a burden on employers and/or employees to engage with the database clearing house to some extent, undermining the objective of automatic transfers. Moreover, there would appear to be few guarantees that the system would be organised in the best interests of individual members, especially those that move jobs in a disorderly manner or leave the labour market altogether.
A 'pot follows member' approach might work well for a well-paid employee changing job relatively infrequently and moving between employers with quality schemes. It will work less well for a low-paid worker in an insecure sector - the very type of worker who is at most risk of building up a small pension pot. The danger is that their small pot will be transferred a number of times, including periods in and out of NEST (assuming transfer restrictions are lifted to allow transfers in and out of NEST). This can only be complicated and expensive.
We believe that an 'aggregator' approach, generally speaking, best protects consumers while minimising complexity for employers. A system using a limited number of aggregator schemes, allowing savers to amalgamate small pension pots in one place, could ensure that all schemes receiving auto-transfers are high quality, and mean that employers can easily contact them.
We welcome the government's recognition that there are challenges in implementation and the commitment to explore further how the pot follows member approach might work, and call for equal consideration to be given at this stage to the various aggregator options that have been proposed.'
NOTES TO EDITORS:
- All TUC press releases can be found at www.tuc.org.uk
Abbie Sampson, Which? T: 020 7770 7563 M: 07725 223 658
Liz Fairweather, Age UK T: 0203 033 1718
Rob Holdsworth T: 020 7467 1372 M: 07717 531150