The Government yesterday published further details of its proposed “pot follows job” regime, under which small defined contribution (DC) pension pots will transfer automatically to the new employer’s scheme when an individual moves job. Further details are set out below.
With the advent of auto-enrolment, the number of small pension pots is set to increase dramatically. The Government is concerned that many people may lose track of their pension savings as they change employment over time. In a development that surprised many in the industry, the Department for Work and Pensions (DWP) announced in its July 2012 consultation response that it would introduce automatic transfers of small pension pots to the new employer’s scheme when an individual moves job (rather than adopting the “aggregator” approach that many respondents preferred).
The latest developments
On 23 April 2013, the DWP published a paper, “Automatic transfers: consolidating pensions savings”, setting out further details of this proposal. Key details are summarised below.
What schemes will this apply to?
Automatic transfer will, at least initially, only apply to (trust and contract based) DC but not defined benefit (DB) schemes. The Government confirms that DC in this context means “pure” DC benefits, which are calculated solely by reference to the assets held in the fund. In addition, standards (as yet unspecified) may be set for automatic transfer schemes. The previous proposal that automatic transfers would apply only to schemes used as automatic enrolment vehicles appears to have been dropped.
What size pots will be eligible?
Initially, eligible pots will be those worth £10,000 or less which first began to accrue “after a certain date” (yet to be confirmed). £10,000 is around the median range proposed in last year’s consultation and broadly reflects the level at which annuity rates start to become competitive. The Government estimates that this would achieve reasonable consolidation, leaving only around one in thirty people retiring between 2050 and 2060 with five or more dormant pots. The Secretary of State will be required to review this limit every five years and revise it if appropriate.
Who will be eligible?
The proposal will cover all “workers” who are active members of a workplace pension scheme, not just those who are automatically enrolled. Details of precisely what “workers” means will be contained in regulations. Individuals will have the right to opt out of automatic transfers within a prescribed period.
How will the transfer process work?
This is not yet clear. The two potential processes mentioned are a “pot-matching” IT system (a central IT system that would identify dormant pots and match them to the new employer’s scheme) and a member driven “employee information system” (which would involve the new employee passing pension information to their employer on starting work, as with the PAYE P45 form).
Information will need to be given to individuals on the effect of automatic transfers and their right to opt out. Who gives this (and what it must say) will be set out in regulations.
Who will oversee compliance?
The Pensions Regulator will be the main enforcement body for the automatic transfer process. Penalties for breaches of the regime will be prescribed in regulations.
What’s happening to short service refunds?
Occupational pension scheme members are currently entitled to choose a refund of their contributions if they leave the scheme with less than two years’ pensionable service. The Government reiterated its plan to abolish so-called short service refunds for occupational DC (but not DB) schemes. This is now scheduled to happen in 2014.
The DWP’s paper comprises only a very broad overview of some the issues that will need to be addressed before “pot follows job” goes ahead. This proposal will be far from straightforward both for the Government to implement and for employers and schemes to put into practice.
At least in the short term, the proposals are likely to add to administration and cost burdens, particularly if the Government decides that a new “pot matching” central IT system is required. The DWP says that this could be set up by the industry or Government but even if the Government were to build and maintain this, it says it “would expect to recover the cost from the industry”. It is unclear what extra burdens are set to be borne by trustees and employers.
The confirmation that DB pension rights have been excluded from the scope of automatic transfers is welcome. There is likely to be debate over what constitutes a DB right in this context, due to the new but not yet in force statutory definition of “money purchase benefits” (which is likely to be used for these purposes).
The Government plans to include a broad automatic transfer framework in the current Pensions Bill. The crucial detail will be set out in later regulations which, given the complexity of the issues to be addressed, are unlikely to be published for some time.