Workers who move from job to job will be able to take their small pension pots with them from October 2016, under Government plans announced this week.
The new system is an update of the implementation of automatic pension transfer, or “pot follows member”, and will enable employees to consolidate any backlog of dormant pension pots they have accumulated throughout their career into their current employer’s pension scheme.
From autumn, people will initially need to actively transfer their pension pots, but it will eventually happen automatically whenever they move job – unless they opt out.
Pensions Minister Steve Webb said: “If we fail to take action there could be over 50 million dormant pension pots drifting away from savers by the middle of this century – that’s billions of pounds floating around that should be funding better retirements for people.”
There is currently an estimated £3bn worth of “lost” pensions – assets that have been forgotten about – and that could potentially grow with the ongoing roll-out of auto-enrolment.
More than five million employees have already been automatically enrolled into a workplace pension scheme, and this will increase further as small and micro-employers are brought into automatic enrolment over the next three years.
In anticipation of this, the new arrangements are designed to ensure that the portion of “dead money” which is locked up in old workplace pension schemes doesn’t grow any bigger.
Mr Webb continued: “Auto enrolment is helping people to save for retirement, but we must help them to keep their pots together so they know clearly that their pension is growing for their future.
“With the average person now having 11 jobs in their career, this further reform is essential.
“I want to introduce ‘pot follows member’ as soon as possible so we don’t lose the momentum that automatic enrolment has delivered in turning around pension saving in Britain.”
The new announcement follows nine months’ collaboration between the Department for Work and Pensions and the pensions industry to analyse different options to create a safe and efficient model that helps employees save for their future.
Under the plans, automatic transfers will first apply to a limited number of larger schemes – covering the vast majority of UK pension scheme members.
The first stage will introduce automatic matching of an individual’s mini-pots, when an employee will be contacted to confirm if they want these pots to be moved to their new scheme – with an initial opt-in system introduced first, ahead of a full opt-out model. The transfer of dormant pensions will then take place automatically unless the member decides not to make the transfer.
John Lawson, head of policy at Aviva, said the plans would lead to a much better outcome for employees over the long term.
“People are changing jobs much more often than they did before, and building up lots of small pension pots, but they don’t engage with them,” he said.
“The big benefit of this will be that people will see their pot build up much more quickly, and that will improve engagement.
“In Australia, where they’ve had compulsory pensions for about 20 years now, people tend to know exactly how much they’ve got in their pension. Once they see that it amounts to a decent proportion of their annual salary they start to really care about it and engage with it – which has got to be a good thing.”
Despite welcoming the new plans, Mr Lawson said that more still needed to be done to improve the pensions regime.
“The obvious thing is that contributions should go up. It’s forecast to reach 8 per cent [of gross salary], but not until 2018, and even 8 per cent is not going to be enough to give you the lifestyle you’re used to,” he said.
“It really needs to be pushed up to 12 or 15 per cent, but that will have to be done gradually, otherwise people’s monthly disposable incomes will come down.”