Government behind on small pots push

The Department for Work and Pensions published an update, following a consultation with the industry about a legal framework for people with small individual funds.

It has plumped for a ‘pot follows member’ system, whereby providers are required to accept the accumulated savings of new employees – up to an as-yet-undecided size.

The rules are to prevent the proliferation of small pots post auto-enrolment, with DWP research suggesting the “total number of dormant pots” – currently around five million – will rise to 50 million by 2050.

But despite discounting individual personal pensions from the proposals — instead opting for “a model of automatic transfers that includes pots created in automatic enrolment schemes only” — the government has committed to continue consultation over a raft of areas where decisions have not been taken, making it unlikely to have firm rules in place by the first staging dates in October.

The proposed rules include the upper limit on pot size – above which automatic transfers are no longer compulsory – and what to do with the pots of those who leave employment. The DWP has further confirmed to PW it is undecided on whether to legislate for these rules or to try to impose them through regulation, which would be faster.

A DWP spokesman said: “Our immediate priority is to work with the pensions industry to develop detailed options for the automatic transfer process. Decisions about the timing and implementation approach will depend on the outcome of this work.”

And pensions minister Steve Webb said: “Automatic enrolment is starting. Many will be saving into a pension for the first time, benefiting from their employer’s contribution and securing a better income in retirement.

“Our achievements would be undermined if people were to lose track of their pension savings and so miss out on valuable retirement income.

“We want to ensure they can build up substantive pots so they can secure a decent income in retirement. And we want to tackle market inefficiencies of administering multiple dormant small pension pots.”

The DWP's key responses

■ On balance, a system of automatic transfers to the new employer’s scheme is our favoured approach.

■ We recognise the concerns about implementation, so we want to develop a model of automatic transfers that includes pots created in automatic enrolment schemes only.

■ We agree that defined benefit and legacy pots should be out of scope at this stage and that there should be opt-out, and the automatic transfer process for small pots should be unadvised business.

■ We agree there is a need to look at issues of consumer detriment and how the system might work where people have multiple jobs or gaps in employment.

■ We would like to achieve change as soon as practicable, and want to work further with all interested parties to develop proposals and understand how they might be implemented and funded.

■ We will also work with industry to explore the potential of a virtual pot solution, particularly to help those with larger pots see all their savings in one place.

■ We will work alongside the pension industry’s new working group, which will be looking at the scope for making immediate improvements to the current voluntary transfer framework.

■ We will abolish short-service refunds at the earliest legislative opportunity, but would like to explore with the pensions industry and employer representatives the idea of allowing micro pot refunds in an automatic transfer solution.