AJ Bell : DWP goes ‘Back to the Future’ on small pots auto-transfers

• The Department for Work and Pensions (DWP) has published a report setting out how the growing number of deferred retirement pots should be addressed https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/945319/small-pots-working-group-report.pdf
• Policymakers concerned very small workplace pensions could be eroded to nothing by flat-fee charging structures
• Government wants automatic enrolment providers to work up reforms which would allow large scale consolidation of small pots
• The Coalition Government first proposed the idea of automatic transfers of small pension pots in 2013 - before ditching the plans in favour of pensions dashboards reforms

Tom Selby, senior analyst at AJ Bell, comments:

'The DWP has jumped in its very own DeLorean and travelled back in time to address the small pension pots problem created by automatic enrolment.

'The small pots issue is caused because workers are estimated to have, on average, roughly 11 employers throughout their working life. As a result of auto-enrolment, each of these jobs could result in someone building up a new pension with a new provider.

'This is not ideal for a number of reasons. It is potentially inefficient for providers - with extra costs of this being borne by members - and risks leaving people struggling to understand the value of their various pots.

'If people don't understand what they have in their pensions, they might struggle to know whether they are on track or need to boost their contributions. Furthermore, having multiple pensions with different providers is an administrative nightmare when you come to taking a retirement income.

'Automatic transfers were first proposed to address this problem in 2013, before being dropped in part due to concerns over complexity and risks that members would end up losing out as a result. In its place came pensions dashboards reforms, which should eventually allow people to see all their retirement pots in one place.'

If we have dashboards, why are automatic transfers necessary?

'While dashboards may help people know where all their pensions are, they will not address the issue of small pots being eroded away by flat-fee charging structures.

'Analysis carried out as part of this report shows a £100 pot, deferred at age 22, with an annual flat-fee charge of £25 and an annual management charge of 0.25% could be whittled away to nothing before the member reaches state pension age. A pot worth £500 deferred at age 22 with similar charges would be worth just £100 by age 68.

'Such a situation is clearly viewed as untenable by the Government, in part because it risks creating a slew of 'pension rip-offs' headlines that could undermine trust in auto-enrolment.

'However, this risk also exists with auto-transfers. If, for example, someone's pension is moved to a higher charge or lower quality scheme without their input, they might understandably feel aggrieved.

'It is perhaps for this reason that the DWP is treading extremely carefully, at this stage only asking the industry to come up with solutions rather than attempting to rush through legislation.'