Of interest to all schemes is the recent publication by the DWP of a paper setting out further details about plans to introduce a “pot-follows-member” automatic transfer mechanism from October 2016.
The DWP is determined to develop the pot-follows-member mechanism, as it recognises that, following the roll-out of auto-enrolment, there is likely to be an increase in the number of dormant small pension pots in future years.
The policy paper published on 11 February 2015 explains that the intention is to bring the reforms into effect in two phases, starting in October 2016:
- members will first be asked whether they wish to opt-in to a transfer to their new employer’s workplace pension scheme; and
- secondly, transfers will take place automatically unless the member opts out.
No date has been given for the move to the second phase.
The following conditions will need to be met for the automatic transfer mechanism to apply:
- the member must have been saving into a charge-capped default arrangement that provides DC benefits under a workplace pension scheme operated by their previous employer;
- the first contribution to the scheme must have been received on or after 1 July 2012;
- after changing jobs, the member starts saving into another charge-capped default arrangement providing DC benefits run by their new employer;
- the pot is worth £10,000 or less at the point of valuation (this limit will be reviewed every 5 years); and
- the pot is dormant. The DWP has decided this will be interpreted as meaning no contributions have been paid in the 12 months following the most recent annual statement. This requirement is intended to draw a distinction between genuinely dormant pots and circumstances where members have merely stopped contributing temporarily, for example on account of family circumstances.
There will be four key stages in the automatic transfer process:
- Pot flagging. When a scheme becomes aware a member has stopped contributing, the scheme will have to assess whether a small pot is eligible to be transferred. If an eligible pot is identified, the ceding scheme must communicate information about it to their chosen register. Standard items of data will be required, including the member's personal details, National Insurance (NI) number, the identity of the employer and the scheme tax identifier number.
- Pot matching. When a new member joins a workplace pension scheme, the scheme will be required to search for eligible pots associated with the member that have been flagged by a previous scheme. A positive match will be deemed to be found if a pot appearing on the register matches a member's date of birth, NI number and certain other data.
- Contacting the member. If a positive match occurs, the new scheme will inform the member. During the first phase of implementation, the member will be asked whether they want to go ahead with a transfer of their small pot to their new employer's scheme. During the second stage, a transfer will be automatic unless the member chooses to cancel it. Further work is being conducted on the form of communications with members. The DWP does not plan for these communications to constitute regulated advice.
- Pot transfer. Once the member has confirmed that they wish to go ahead with a transfer, the new scheme will contact the ceding scheme to request the transfer payment. The DWP considers transfer payments should be made electronically in the interests of efficiency and cost-effectiveness. Further investigation will be undertaken about appropriate time limits for the transfer process and the possibility of allowing bulk transfer payments to be made. The DWP believes that members' interests are best served by requiring transfers “within a matter of days not months”. Schemes will be given a statutory discharge when a transfer has taken place.
Although there have been misgivings expressed throughout the pensions industry about the scheme’s workability and potential costs, the DWP seems determined to pursue the pot-follows-member model. Some critics have proposed a central aggregator in the mould of NEST. The policy paper highlights the enormous range of complexities that could arise as the mechanism is developed. For example, it is not entirely clear how often the “pot matching” process will have to be undertaken by a worker's new employer's scheme, or what should happen if a worker changes employment several times in quick succession. The cost to schemes entailed by the new system of registries is also unclear.
However, it is early days, and there is a General Election on the horizon, following which the Government’s intentions could change. We will monitor the progress of the relevant legislation and provide more information and a detailed briefing once the proposals become clearer.
View the framework paper.