In brief
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.
Clearly, it is difficult to assess, at this stage how the proposal will work in practice as the detail still remains to be worked out. Broadly though, and unlike the auto-enrolment regime, the spotlight is on the schemes rather than employers.
There seems, on the face of it, little for employers to do but this does not mean that employers should not be aware of the proposals. It is easy to see how a worker moving jobs might become confused when working out the differences between being automatically enrolled into an auto enrolment scheme and the automatic transfer of a dormant pot to a new automatic enrolment scheme. Clear communication will be essential.
The reason why the Government initially settled on a pot size maximum limit of £10,000 seems to be that this is generally considered to be the lowest level at which a person can buy an annuity on the open market at a competitive rate. The Government does not want to capture larger pots because it is recognised that some may contain features which may potentially cause detriment to members where they are moved between different schemes, such as surrender penalties.
Finally, the reference to setting quality standards is a telling indication of the direction of travel for regulation. The proposal makes specific reference to the Pensions Regulator's draft code of practice and guidance on providing good member outcomes for money purchase schemes. We do not know what the standards will look like, if introduced, but it is plausible that they will be similar to those standards set out in the Regulator's draft code and guidance. This is another reason for employers to take care in the quality of schemes they select for auto-enrolment purposes.
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