Where do we stand on pot-follows-member after the Budget?

This year has seen the proposed removal of the requirement to purchase an annuity and the potential for collective DC, both of which present significant opportunities for us, but also challenges.

In 2013, pot-follows-member consolidation was a big challenge but now it is seldom talked about. This is the proposal that DC funds below a certain threshold, originally £10,000, follow a worker when they change jobs.

Conceptually this always felt like the right approach but practically it was perceived as possibly difficult to achieve.

It is important to remember that the option to take DC funds as cash is just that, an option, and for some members the preference will still be to purchase an annuity, and therefore consolidating small pots remains important.

Say I have just left my employer and have a small pot left in their scheme. I have a new employer with a DC scheme which I join. I tell my new employer about my small pot and they effectively pull this across from the former scheme and add it to the pot I am now accruing.

The idea makes sense but the ‘how’ is the challenge. When pot-follows-member was first discussed there were two ways suggested that this could be implemented. 

First, a database that all administrators and providers would access. All small pots would be posted on this database, members would have a unique ID which they would share with their employer who could then use this to pull across the small pot. The technology, however, is only part of the issue.

There needs to be a process to ensure that the small pot is identified and posted in the first instance and in a timely manner. This process needs to extend to the physical transfer of funds and, of course, the member needs to be kept informed throughout. 

It would be even better if the database could also be accessed by the member and texts or emails were sent out automatically to keep the member updated with progress.

A pensions P45

The second option was paper-based and designed to work in a similar way to a P45.

On leaving the scheme, the workers would get their pension P45 equivalent, detailing the value of their small pot and the contact details for the transferring scheme. 

The new scheme would then go through a process ‒ not dissimilar to the current transfer process ‒ to obtain the funds. There are plans to simplify the transfer process if the ‘how’ is in this form.

There are a number of points of detail that need to be sorted out, such as: when is the small pot decision made, as fund values change? Can members opt out? Will there be a cooling-off period? Will the process be restricted to leavers or joiners after a certain date?

So, where are we now? Well, still waiting for confirmation that this reform is going to be implemented and the preferred approach for doing so.

Automation must surely be the optimum solution but the question remains who owns, funds and builds the database and the associated technology requirements to go with this.

At the outset there was perhaps an expectation that this would be the pensions industry.

The diverse size and nature of providers and arrangements would, however, suggest that this development probably needs to be centrally owned and managed, possibly by HM Revenue & Customs or the Department for Work and Pensions.

For the reform to be successful, the industry needs to know two things as soon as possible – the how and the when.

Administrators will need to make system changes, build new processes and draft suitable member communications, all of which take time.

Geraldine Brassett is a client relationship manager at Aon Hewitt