Nest report author voices concern over small pots

Speaking at a Friends Provident Global Forum event, the former Treasury economist said it was essential for transfers to be allowed in and out of the National Employment Savings Trust (Nest) to prevent the build up of small, unclaimed pension pots.

If employees frequently move jobs, each time starting a small pension pot, it would pose an administrative burden on employers and be hard for individuals to manage all their savings.

“This is going to be a big problem,” he said. “How you deal with it, I don’t know. But if the government can sort it out it will make the whole proposition much more attractive.”

Johnson urged the government to look at ways of making the process simpler.

Last week’s report, entitled Making auto enrolment work , recommended: “Government and regulators should review as a matter of some urgency how to ensure that it is more straightforward for people to move their pension pot with them as they move employer, so that by the time of the 2017 review the more general issue of pension transfers has been addressed and Nest is able to receive transfers in and pay transfers out.”

The Australian compulsory superannuation system has suffered greatly from the volume of small pots. Figures from the Institute of Actuaries of Australian showed there were 30.5 million accounts for just 11 million contributors.

There are also believed to be 6.4 million lost, orphaned or inactive accounts in the system, with aggregate assets in the region of $A13bn (£8bn).

Johnson said the fear of inactive accounts led him and his co-authors – David Yeandle of The Engineering Employers’ Federation and Adrian Boulding of Legal & General – to recommend a three-month waiting period between an employee joining a firm and them being auto-enrolled into the pension scheme.

“There was very strong support for a waiting period from employers,” he said. “There is a relatively high turnover of staff within their first few months of employment, but this drops dramatically after 12 months.

“It seemed to us that three months was a good balance.”

But Dominic Fryer, UK corporate strategy and risk manager at Friends Provident, said the problem of small pots would still remain in spite of the three-month waiting period.

He said this was due to employees opting out once they saw the contributions on their payslip and also seasonal workers changing employers frequently.

He said: “There are a number of ways to mitigate the costs and burden. This will depend on the type of scheme the employer is running. If it is a contract-based scheme the costs will fall mainly on the provider, however the employer will have to put in processes to deal with opt-outs and refunds.

“For trust-based schemes there may be more complexity but there is the option to allow an employer to benefit from a refund of contribution for leavers in the first two years. This may make the trust-based route more attractive and this is an area where the report recommends additional investigation in order to create a level playing field and avoid arbitrage between the different pension regimes.”

He added: “We would welcome this consistency between regimes and this will avoid a potential drift back to DC trust-based schemes for some employers which we believe would be a retrograde step.”

The report showed workforce churn (the percentage of employees leaving within a year) was particularly high among smaller employers. For firms with fewer than 20 employees the annual proportion was 17%, compared to 12% in firms with 20 or more.

According to the Office for National Statistics’ Labour Force Survey, the total proportion of employees leaving before three months is 4.8%, compared to 4% leaving between three and six months.

The data show younger workers (those aged 16-29) are far more likely to leave their employers in the first three and six months, compared to workers aged 30-45.

Johnson said if the waiting period had been set at six months, there would be a lot of employees who would frequently change jobs after a relatively short period of time and miss out on making any pension saving.