Pensions consultancy LCP is calling for a ‘magnetic pensions’ strategy to help tackle a leap in small pension pots, estimated to be increasing at 2m a year.
LCP says small pension pots are an unresolved side effect of the auto-enrolment workplace pension policy which means each new job potentially creates a new pension.
The firm estimates that over 2m new pension pots are ‘left behind’ each year as people change jobs and start a new pension and there are now over 16m small deferred pots worth under £2,500 each.
Those who change jobs frequently can end up with multiple pension pots, often small in value, scattered across the pensions landscape, LCP says.
LCP wants to see a ‘magnetic pension’ approach where small pots are automatically combined.
The Government is already considering a range of initiatives to tackle the problem including automatic consolidation of ‘micro’ pension pots (under £1,000) and more controversial ideas focused on providing ‘member choice’ in workplace pensions, as floated in the 2023 Autumn Statement.
LCP warns that there are potentially serious problems with the government’s approach, including a big increase in the cost of providing pensions; a risk of members making poor choices as they may find it hard to compare multiple past pension providers and the risk that ordinary savers would be left behind if higher earners exercised member choice and moved their pension money elsewhere.
The remaining workplace scheme would be less cost-effective for a pension provider which might hike its charges in response, to the detriment of the remaining members.
LCP has suggested that each time a person changes job, their past pension would be ‘magnetically attached’ to them and move with them to their new job, where it would be combined with their new workplace pension.
Small pots would continue to be combined in this way until the worker had accrued a decent single pension pot at which point the automatic transfer of pensions would cease, LCP says.
Workers would be free to opt out of this process at any point if they wanted their pension pot to remain where it was.
LCP says the ‘magnetic pension’ proposal builds on the 2014 Pensions Act proposal for a ‘pot follows member’ solution, which was passed into legislation but never implemented.
The new proposal would build on the infrastructure provided by the Pensions Dashboard Programme, which is due to go live in the next few years. LCP believes the Dashboards provide a ready-made network of connections between pension schemes and a central system which could be readily harnessed for the purposes of delivering the Magnetic Pensions proposal.
Laura Myers, head of DC Pensions at LCP, said: “With over 2 million new pension pots being left behind each year as people change jobs, we urgently need a solution to the problem of small pension pots but the Government’s plans are complex and expensive and will take years to implement. Worse still they may lead to worse outcomes for many ordinary pension savers.
“We are advocating a much simpler and more cost-effective solution which keeps the best features of automatic enrolment, such as a single pension scheme in each workplace, but makes sure that people do not reach retirement with large numbers of small pension pots. We hope that the next government will think again about the current direction of policy and instead deliver a solution which pension savers will understand and which will deliver the best outcomes for people on average and lower incomes.”
