PensionsMar 26 2012

Government told to tackle small pension pots

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The government must act now to help savers with small pension pots get better outcomes in retirement, the National Association of Pension Funds said today (26 March).

According to the NAPF hundreds of thousands of small pension pots are already “stranded”, a problem that is likely to get worse after the introduction of automatic enrolment.

Under automatic enrolment, as workers change jobs it is likely they will build up multiple pension pots.

However, the NAPF pointed out small pots can be burdensome for employers and pension schemes, and they may not offer the best value for money for savers.

A study from the Institute of Fiscal Studies (IFS), jointly funded by the NAPF and the Economic and Social Research Council (ESRC), showed £1.4bn is already trapped in 700,000 stranded workplace defined contribution (DC) pension pots worth less than £5,000.

In its response to the government’s consultation on small pension pots, the NAPF reiterated its call for a new way of thinking about defined contribution pensions.

Large scale, good quality trust-based pension schemes would secure better outcomes for savers and would also deal with the small pots problem.

The NAPF called on the government to set up a framework for new super trusts that will make it less likely that people will transfer their pension pots, and give them the opportunity to consolidate their existing pension provision.

Darren Philp, director of policy at the NAPF, said: “Small pots are a huge problem for pension savers and pension schemes. Automatic enrolment is a once in a generation opportunity to tackle our pension savings crisis and the government must act to ensure the success of these reforms.”

He warned the current system left savers with too many pots to keep track of, creating “unnecessary complexity” and not leading to the best outcomes in retirement.

Mr Philp said: “In a world where defined contribution pensions are becoming the norm, we need a system that helps pension savers achieve the best outcomes in retirement.

“Combining small pots will help, but we also need schemes that can look out for the interest of savers. Good quality, large scale super trust schemes would look after members’ interests and could accept small pots automatically.

“Small pots are a big problem, but it is important that the government considers all its options carefully before it makes any decisions on which transfer mechanism to adopt.”