Will 'forgotten pensions' solution leave you worse off?
The government has hit on a solution to make sure this never happens again. The problem is, that some of the experts say it could make things even worse.
ForgottenWhen you move jobs, it's up to you to remember your pension, and make sure you let the provider know your address whenever you move. Alternatively, you can bring all your pension savings together in one scheme. However, you have to orchestrate this yourself, without the help of your employer.
It means that billions of pounds of pension savings are getting lost or forgotten, especially when people change jobs every couple of years and have a string of small pension pots that are easily forgotten.
The solutionThe Department of Work and Pensions has hit on a solution, so that the money never goes missing again. It thinks that the pot should automatically follow you around, and switch to your new employer when you move jobs without you having to do anything. At the moment it is only suggesting doing so for defined contribution pensions which people have auto-enrolled into - but it could roll it out more widely if it deems the process a success.
Steve Webb, the pensions minister, announced the plans, saying: "We need a system where people build up worthwhile pension pots in one place rather than having lots of small pots all over the place. But at the moment every time someone moves to a new job there is a risk that they leave behind a small pension pot which they lose track of. Our plans will mean that individuals get better value for their savings and bigger pensions as a result.
"Automatic enrolment will help millions of people save into a pension, with a contribution from their employer. Our overall goal of getting millions more people saving would be completely undermined if people are let down by a set of rules that mean people lose track of money saved and miss out on vital income in retirement."
Some of the experts are celebrating. Otto Thoresen, Director General of the Association of British Insurers said:"Our consumer research tells us emphatically that people want to be able to take their pension pots with them as they move jobs. We are pleased that the Government, after considering all the issues, have announced their intention to develop a 'small pot follows member' design. This will reduce the number of lost or stranded pots and give people greater choice as they will have a larger pot when buying a retirement income."
The worryIt sounds logical. However, other experts are concerned that it could end up making things worse. Tom McPhail, head of pensions research at Hargreaves Lansdown says it is another example of where the government is relying on 'defaults and nudges' which mean that those who do nothing will end up with a pension (albeit a disappointingly small one).
And while this saves more people from falling through the cracks entirely and ending up with nothing, it means many more people give themselves permission not to engage with the subject of pensions - because the defaults are dealing with it for them.
He says: "Research has repeatedly shown however that the most important factors affecting payouts are ones which require member engagement. These include the amount which is paid in, their investment choices and the decisions which the member takes at retirement. " He adds that the system the government is suggesting "would encourage disengagement and ultimately lead to poor outcomes."
He adds: "The primary policy objective should be to make it as easy as possible for investors to take responsibility for their retirement savings and to achieve good outcomes. Defaults such as auto-enrolment work up to a point however if investors are not also encouraged to engage with their retirement savings, they will be allowed to sleepwalk towards an impoverished retirement."
AlternativeHe agrees with the government that short service refunds - which mean you get your money back from your pension if you haven't been with the company very long - should be abolished. Webb has already stated that the government intends to do this - it just hasn't got round to it yet.
However, McPhail is is calling on the government to re-think the res of its plans - which are currently up for consultation. He feels that the sensible alternative is to make pensions more flexible and transparent, so people can see exactly what they are paying in charges and how their investments are performing - so they can decide whether or not to move the pots. He also wants an end to exit penalties - so people are not discouraged from moving small pots from under-performing pensions.
Finally, he says that the new pension scheme introduced alongside auto-enrolment could offer a solution. This scheme, called NEST, is a central pension run by the government for those who don't have a workplace pension. When they are auto-enrolled by their employer, the money goes into NEST. He says the restrictions on this scheme should be dropped, so that it can be used as "A central aggregator for very small pension pots which are uneconomic for the pensions industry to look after in isolation."
- The next pensions scandal
- Review: Private pensions too costly
- Should we still be paying for public sector pensions?