Auto-enrolment obligations were introduced from October 2012. These fall on different employers at different times according to their staging dates. The overall effect, of course, is to make saving for retirement the default option for most workers. To avoid this outcome, a worker needs to opt out. It still remains to be seen whether the largest exercise in inertia selling of all time will be successful or not.
But, before the paint is even dry, the government has already moved onto the next big thing in inertia selling. This month, the government has published proposals on new primary legislation to promote consolidation of pensions savings as workers move jobs - the so called "pot follows member" policy. The intent is admirable and well-meaning, aimed at helping ensure workers maximise their retirement income.
The challenge, however, is to achieve this in a cost effective and practical fashion. There are other risks too, including increasing red tape for business.
In more detail
The government's analysis shows that, on average, a worker works for 11 different employers over a career. Under auto enrolment, when a worker leaves an employer, a dormant pot also remains behind. It is estimated that there will be 50 million dormant pots by 2050 with 33 million of those containing a value of under £10,000. The concern is that fragmentation of a worker's pension savings in a number of small pots over a career will result in less money for that member to purchase a high quality pension on retirement (because administration charges will be higher) and/or to obtain the best annuity rates (as insurers structure their rates to attract the larger pots).
Final salary schemes are excluded from the proposal. The focus is squarely on money purchase schemes.
Overall, the proposal, as announced, is somewhat tentative. It sets out the government's thinking, but invites comments from stakeholders. The main features are:
- it will apply to a broad category of workers;
- it will apply only to pot sizes up to a maximum value of £10,000;
- a power will be provided under secondary legislation to set quality standards for schemes receiving automatic transfers;
- the scheme which a member leaves will be required to identify the member's pot which is potentially eligible to transfer and to provide specified information about the pot so that it can be identified when the member joins the scheme of his new employer; and
- the new employer's scheme will be required to search for information about dormant pots and if it finds any, it will be required to inform the member that the pot will be transferred unless he/she opts out. This has the potential to be a very significant burden on schemes.
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