British Government plans will screw pensions by 25%

Pensions could lose a quarter of value under Government plans, groups warn

Workers who change jobs risk losing up to a quarter of their pension under Government plans to let employees carry retirement funds with them, consumer groups, charities and pension funds warn in a letter

By James Hall, Consumer Affairs Editor
9:50PM BST 15 Oct 2012

Under proposals by the Department for Work and Pensions (DWP), people who move jobs will be able to transfer pension pots from former employers into the retirement scheme at their new place of work. The so-called ‘pot follows member’ scheme is designed to prevent millions of small retirement pots lying dormant and forgotten after people change jobs.

However, leading charities and consumer groups representing millions of savers today urge the DWP to “think again” about the scheme, which they say is “impractical”, “unacceptably risky” and could be “highly expensive”.

The letter is signed by Joanne Segars, the chief executive of the National Association of Pension Funds (NAPF), Michelle Mitchell, the charity director general at Age UK, and Peter Vicary-Smith, the chief executive of consumer group Which?, and Brendan Barber, the general secretary of the TUC.

The groups argue that the ‘pot follows member’ scheme could significantly reduce the value of a pension as – over the course of a person’s career – it would involve money being transferred from good schemes with low fees and high returns into poorly-managed schemes with high charges and low returns. Given that the average person works for 11 companies over their career, the scheme would also entail a “significant burden” of red tape.

The groups instead call on the Government to put in place a system of low-cost “aggregator schemes”, which would pool people’s retirement savings from previous jobs in just one place. Agregator schemes would have low charges and give clarity to savers.

As well as writing to The Telegraph the groups have spelt out their concerns about the potentially “damaging” consequences of ‘pot follows member’ in a letter to Steve Webb, the Pensions Minister.

The difference in the value of a person’s retirement pot between the two schemes could be as much as 25 per cent, the groups argue.

They calculate that a person on half-average earnings who saves for 45 years would have a pension £82,000 in an ‘aggregator scheme’. However, this would fall to as little as £61,000 in a ‘pot follows member’ scheme due to high fees and variable investment returns.

The Government is keen to put in place a system whereby people can track their pensions because it has just introduced auto-enrolment, a major piece of social policy that obliges companies to give all their staff workplace pensions. Auto-enrolment is designed to get up to 11 million people saving into a private pension for the first time.

However, because people pay into auto-enrolment through their employer, there is a danger that there will be millions of stranded or dormant pots when people change jobs.

Plans for the ‘pot follows member’ scheme were announced by Mr Webb in the summer following consultation with the pensions industry. Although the scheme’s implementation requires primary legislation in parliament, Mr Webb said he is keen to push ahead with it “at the earliest opportunity”.

The DWP estimates that around 50 million dormant pots could be created by 2050 if the system is not implemented. Its ‘pot follows member’ scheme has been designed specifically to prevent people who have been auto-enrolled from losing track of their savings.

However today’s letter makes clear that there are still major concerns about the plan.

The groups write: “We agree with the Government that a system to automatically transfer these small pots is necessary. It is vital that savers are able to get maximum value from even small amounts of savings.

“However, the Government’s solution, where the pot follows an employee who moves job, is impractical and risks reducing individuals’ retirement income. Pots could be transferred into poorly managed schemes, with high charges and low investment returns.”

The NAPF’s Ms Segars added: “Having a pension automatically follow people from one job to the next could create a pensions lottery that leaves many people out of pocket. Our research suggests that a string of bad moves could see people lose a quarter of their pension pot, mostly to charges.”

Under the ‘aggregator’ plans, workers would save into their company’s existing pension scheme for the duration of their employment. However whenever an individual changed jobs, their old pot would be transferred into the aggregator along with all their other previous pots.

Last night Mr Webb said that DWP analysis supports the case for ‘pot follows member’.

The minister said: “Far too many people have absurdly small amounts of money scattered between far too many pension schemes. I am determined to make sure that people start to build up decent pension pots and keep track of them. For too long, an overly complex system has made it hard for people to transfer their money between pension schemes. We need a big shake-up to make it safe, cost-effective and easy to move your pension pot around.

“If people can build up bigger pension pots, they will pay lower charges and get bigger pensions at the end. Our analysis clearly shows that ‘pot follows member’ is the best way to help people to build bigger pots. It is time to stop debating different options and get on with making this positive change for consumers.”

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