Pensions consultancy LCP is looking for a ‘magnetic pensions’ technique to assist deal with a leap in small pension pots, estimated to be rising at 2m a yr.
LCP says small pension pots are an unresolved facet impact of the auto-enrolment office pension coverage which implies every new job probably creates a brand new pension.
The agency estimates that over 2m new pension pots are ‘left behind’ annually as individuals change jobs and begin a brand new pension and there are actually over 16m small deferred pots price beneath £2,500 every.
Those that change jobs steadily can find yourself with a number of pension pots, usually small in worth, scattered throughout the pensions panorama, LCP says.
LCP desires to see a ‘magnetic pension’ method the place small pots are mechanically mixed.
The Authorities is already contemplating a spread of initiatives to deal with the issue together with automated consolidation of ‘micro’ pension pots (beneath £1,000) and extra controversial concepts targeted on offering ‘member alternative’ in office pensions, as floated within the 2023 Autumn Assertion.
LCP warns that there are probably critical issues with the federal government’s method, together with a giant enhance in the price of offering pensions; a threat of members making poor selections as they could discover it onerous to match a number of previous pension suppliers and the danger that extraordinary savers can be left behind if greater earners exercised member alternative and moved their pension cash elsewhere.
The remaining office scheme can be much less cost-effective for a pension supplier which could hike its expenses in response, to the detriment of the remaining members.
LCP has recommended that every time an individual modifications job, their previous pension can be ‘magnetically connected’ to them and transfer with them to their new job, the place it might be mixed with their new office pension.
Small pots would proceed to be mixed on this means till the employee had accrued a good single pension pot at which level the automated switch of pensions would stop, LCP says.
Employees can be free to decide out of this course of at any level in the event that they needed their pension pot to stay the place it was.
LCP says the ‘magnetic pension’ proposal builds on the 2014 Pensions Act proposal for a ‘pot follows member’ answer, which was handed into laws however by no means carried out.
The brand new proposal would construct on the infrastructure supplied by the Pensions Dashboard Programme, which is because of go reside within the subsequent few years. LCP believes the Dashboards present a ready-made community of connections between pension schemes and a central system which might be readily harnessed for the needs of delivering the Magnetic Pensions proposal.
Laura Myers, head of DC Pensions at LCP, mentioned: “With over 2 million new pension pots being left behind annually as individuals change jobs, we urgently want an answer to the issue of small pension pots however the Authorities’s plans are complicated and costly and can take years to implement. Worse nonetheless they could result in worse outcomes for a lot of extraordinary pension savers.
“We’re advocating a a lot less complicated and cheaper answer which retains the most effective options of automated enrolment, akin to a single pension scheme in every office, however makes certain that individuals don’t attain retirement with giant numbers of small pension pots. We hope that the following authorities will assume once more concerning the present route of coverage and as a substitute ship an answer which pension savers will perceive and which is able to ship the most effective outcomes for individuals on common and decrease incomes.”
