The Pensions Regulator has uncovered a massive rise in the number of dormant defined contribution pots resulting from the introduction of auto-enrolment.
The number of deferred memberships has increased in the past year by a staggering 45 per cent to 7,523,000 (includes DC and hybrids), while active memberships have only risen by 24 per cent, according to TPR data published on Thursday.
“The number of deferred memberships will continue to grow as people change jobs and join a new scheme,” said David Fairs, the watchdog’s executive director of regulatory policy, in a blog published alongside the data. “This is likely to be the focus of further debate in the months to come.”
People in smaller schemes need to have a realistic expectation of how little the stretched regulator will be able to protect them
Hugh Nolan, Spence & Partners
The vast number of dormant pots is piling up problems for the future, as is the small average pot size in auto-enrolment schemes – just £3,702, according to the regulator. This will lead to people becoming disengaged and losing track of their entitlement.
But is that set to change as assets grow? “We are on the cusp of a pensions revolution,” said Nathan Long, senior analyst at Hargreaves Lansdown.
“Our evidence shows people are significantly more likely to be interested in their retirement savings when their pot exceeds the ‘pension boredom threshold’ of £5,000.”
Mr Long added: “It’s rather alarming that deferred memberships are growing at almost twice the rate of new active memberships. Allowing people the option to redirect their auto-enrolment contributions into a pension of their choice would be a great way to help limit this problem, while allowing people to take personal ownership of their retirement planning.”
Small is not beautiful
One other area of concern is the huge number of small schemes: TPR's figures show 31,910 occupational schemes have two or more DC members.
Hugh Nolan, director at Spence & Partners, said: “The regulator has an impossible task monitoring more than 30,000 DC arrangements, but fortunately only 6 per cent of them have 12 or more members. People in smaller schemes need to have a realistic expectation of how little the stretched regulator will be able to protect them.
“The good news is that consolidation is going well, with fewer than half of the DC schemes with 12 or more members now than we had in 2010. This should mean that members are increasingly benefiting from economies of scale and better governance,” he added.
The figures also point to the continuing popularity of defined benefit to DC transfers.
Kate Smith, head of pensions at Aegon, said: “The figures show the total amount transferred into DC schemes has risen by almost 150% to nearly £5bn. While this figure will include transfers from other DC schemes, I expect the majority of this is from DB schemes.”
Despite the popular appeal of the freedom and choice reforms, Mr Nolan warned: “There is a risk of members making bad choices, especially if they take their funds outside of the regulated pensions environment. We need to remain vigilant to protect people.”
DC revolution in full swing
The data also show the dominance of DC in the UK. Ninety per cent of all those currently actively saving are investing in a money-purchase scheme.
Ms Smith added: “The private pensions landscape in the UK is evolving to reflect the changing world of work and retirement, with DB schemes having a total of just 688,000 active members compared with the more than 8.4m across all DC trusts. Almost all (99 per cent) of the members of DC schemes are invested in the scheme’s default strategy.”
Worryingly, the average DC pension pot at retirement is still under £10,000.
With minimum contributions into auto-enrolment at such a low level, and no clear indication as to future government policy on future increases beyond 8 per cent, Malcolm McLean, senior consultant at Barnett Waddingham, warns: “Many employees and members will not secure a decent level of income in retirement.”
