Reconsider ‘small pots’ proposals in the Pension Schemes Bill - Ros Altmann
The Pension Schemes Bill is proposing that ‘small pots’ can be moved without member consent after just 12 months of inactivity. This is far too short a timeline – many people – especially women – could take more than 12 months off work for childcare and when they return, their pension pot may have been moved.
It needs to be amended to two or three years, instead of just 12 months, and only after the provider has made proper efforts to contact the member.
Many people will not look at their pension every year – especially as we are told that pensions are for the long-term and if you are still young, or if you have a career break at any age, you may be happy to just leave your pension alone for a couple of years and then start paying into it again. I believe a much longer time should be allowed, before pension providers can assume a member has ‘lost’ their pot.
Many pension providers will want to get rid of these smaller pension funds, because they are uneconomic to run. The larger the pension fund, the more profitable for the provider it will normally be, but small pots often cannot bring in fees that are sufficient just to cover the fixed costs, let alone offer a profit for the pension provider.
Larger pots are cross-subsidising smaller ones to some degree, so the legislation is well-intended, in that it seeks to amalgamate as many small pots as possible in order to improve the overall efficiency of the industry. But member interests must not be overshadowed and some adjustments are needed to avoid ending up doing harm, rather than good.
Changing the minimum period from 12 months to, say, two or three years, should give time for the provider to find, trace and contact the member. This small amendment to the current Bill would seem to offer a route to avoiding some of the obvious pitfalls of selecting too short a timescale.
It is also important to ensure that these reforms are introduced at the right time. In particular, waiting till after the long-awaited Pensions Dashboard is up and running, would give people time to find their lost pots themselves and make their own decisions about whether or where to move them. One of the aims of the Pensions Dashboard has always been to help each individual find pension funds they may have forgotten about or lost track of. It should be operational within the next couple of years, so waiting till after this would be sensible.
The Government vision is to allow bulk transfers of someone's pensions, without their consent. The measures will create a new ‘Small Pots Data Platform’ that can identify people’s pots and match them to that person’s largest existing consolidator pot, to build up bigger funds automatically. The Government and regulators will decide which schemes are best value and most suitable to accept the small pots.
What happens if one of these ‘chosen’ providers hits a period of poor performance – will members have recourse for compensation? Just because a regulator has approved these schemes, does not mean they will all remain high quality.
When the Pension Schemes Bill returns for Report Stage, I hope the Government will lengthen the 12-month minimum to consider a pension ‘dormant’ and strengthen the safeguards to ensure proper efforts are made to seek member consent before moving their money.
Baroness Ros Altmann is a pensions expert and independent peer.