The UK Government is looking into ways to help workers achieve better retirement outcomes, including those with several small pension pots scattered around. The average worker has around 11 jobs over the course of their career, which means some may end up with multiple retirement funds.
This creates a risk of people losing track of their savings as well as the admin costs and inefficiencies created for pension providers of maintaining them. The Department for Work and Pensions (DWP) has launched a call for evidence on small pension pots in Scotland, England and Wales, which will run until March 27, 2023.
It looks at the potential scope for the automatic consolidation of some pots, as well as recognising the impact of other actions, including enabling more member engagement, that could help. Two options which would automatically bring more pensions together include a default consolidator, where small pots would automatically be transferred into a scheme and ‘pot follows member’, where a pension pot would follow an employee when they move jobs and automatically move with them to their new employer’s scheme.
Sir Steve Webb, a former Liberal Democrat pensions minister who is now a partner at consultants LCP (Lane Clark & Peacock) said: “It has been obvious since the start of automatic enrolment [in 2012] that small pots would be an issue, which is why the 2014 Pensions Act provided for a pot-follows-member solution.
“Unfortunately, this was not seen through and, nearly a decade later, we are still at the stage of ‘calls for evidence’ followed by further consultation. What is needed is for someone to take a decision and move ahead with implementation.”
The DWP is also undertaking various other pensions initiatives, including a consultation on a new Value For Money (VFM) framework, developed in partnership with the Pensions Regulator and the Financial Conduct Authority (FCA), which sets out how schemes will be expected to provide savers with better value from their investments and the quality level of service.
The VFM framework will improve competition between defined contribution (DC) pension schemes and require pension schemes to disclose key metrics and service standards, the UK Government said.
Minister for pensions Laura Trott MP said: “Since 2012, automatic enrolment has transformed the pensions landscape in the UK for the better, but we know there’s more to be done to ensure a fairer future for savers.
“Being in an underperforming pension scheme can lead to someone missing out on thousands of pounds. The value for money framework and our new measures will improve security and create better returns for savers, so they can enjoy the retirement they’ve worked so hard for.”
Tom Selby, head of retirement policy at AJ Bell said: “There are now millions of people in workplace pension schemes, including many with multiple pots from previous jobs. As things stand it can be difficult for people to compare the performance of those pensions, and often people are nervous or fearful of engaging with their retirement fund.
“Introducing a common approach to disclosing performance would at least make it a bit easier for people make comparisons and understand what they’re really getting from their workplace pension.”
Helen Morrissey, senior pensions and retirement analyst at Hargreaves Lansdown: “Determining whether a scheme delivers value for money is tricky but, if we can get it right, such a framework can be a powerful force in improving standards across the board, with laggards forced to either change or close.
“This increased consolidation could also bring further improvements for members in terms of cost efficiencies and the potential to invest in more illiquid assets that smaller schemes otherwise would not be able to do. If done right, it will really help employers compare the service providers offer and will enable providers to see where their offerings stand up well and which areas need more work.”
Ms Morrissey continued: “There’s a balance to be struck - make the framework too rigid and you veer into a box-ticking exercise that risks stifling innovation, while keeping it too broad means schemes may not be sufficiently held to account.
“There are challenges though - value for money is a notoriously hard concept to define. It’s a huge positive that the conversation recognises that cost is just one aspect of value for money - we need to look at outcomes too.”
You can find more information on the Value For Money framework consultation on GOV.UK here.
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