The Department for Work and Pensions’ £10,000 limit on automatic transfers between defined contribution pension schemes has split the industry, ahead of the ‘pot follows member’ scheme’s introduction next year.
The scheme involves any workplace pension pot of less than £10,000 automatically moving with the member when they move jobs. Providers and administrators will operate the transfer, but individuals will be provided with information and have the right to opt out.
Kate Smith, regulatory strategy manager at Aegon, told FTAdviser that during the early stages of the DWP’s consultation she thought the limit should be lower because of the risks involved, but thinks that £10,000 is a “pretty reasonable” figure.
“It’s better to have an upper limit at this time, we don’t want lots of money going round the system, £20,000 or £30,000 each time when there’s no active engagement with the member.”
However, Morten Nilsson, Now: Pensions chief executive, questioned the number, suggesting that the limit should be scrapped altogether or set at £25,000 - the average UK worker’s salary - and a level where many people start to notice their pension savings.
“The £10,000 limit is a little funny, because that’s still a small pot. If I look at some of our young employees on average salaries, they might make £10,000 in pension savings after about three years, they will move on many times, with many pots under that £10,000 limit, or several pots just over the limit that are stuck with different providers.
“It used to be that many of the old players in the market said it was not possible to have many clients with less than £10,000, but new providers will have most members with small pots.
“We’re dealing with the core auto-enrolment population, who are lower paid and often quite transient, whereas providers who are aiming at other segments of the market would have the luxury to say ‘it’s really nice to get rid of all those lower paid members’ and we can keep our core savers.”
Ms Smith and Mr Nilsson also disagreed on the model used, with the former backing the ‘pot follows member’ approach, while the latter favoured the centralised aggregator model put forward during the consultation.
Ms Smith said: “The aggregator model is a bit like a dormant scheme, where money is pushed away and there’s the potential for members forgetting about it or not relating to it in the same way, whereas we’re trying to encourage engagement with pot follows member.”
Mr Nilsson countered: “The concerns we have with pot follows member is that a lot of savers will think this is perfect for them, but the issue is that it’s another huge project that I am doubtful can be done in a way that’s efficient enough. We have a lot of agency workers and I can see a whole lot of members churning through this, with transfer costs eroding the value of their very small contributions.”
Nigel Waterson, Now: Pensions’ trustee chairman, previously told FTAdviser that the ‘pot follows member’ approach should be revisited after the next election.
He stated: “Whatever route is ultimately adopted, the costs to the industry both in terms of time and money are going to be significant which is why it’s critical all transfer mechanics are thoroughly considered and assessed. A rushed solution could prove an extremely costly mistake which would prove even more costly to undo.”
Ms Smith agreed that getting costs down is crucial to ensuring auto-transfers actually work. “We’ve got this Origo system which takes around 10 days to transfer things, but it will need to be quicker and cheaper under auto-transfer. Once we’ve developed something, the hope is that we can use that for member initiated transfers, to make that process better.
Mr Nilsson added: “I like the idea of it becoming automated, but it has to be cost efficient and simple.”
