Article date: 27 June 2013
- The ‘one member, one pot’ approach involves employees ‘owning’ a single pension throughout their careers.
- Pension savings are safer as there are no physical transfers of money.
- There is a reduced risk of pension liberation fraud.
- Employees’ pension pots stay with them when they move jobs.
- Providers are incentivised to deliver good pensions.
- The technology is currently available to support this approach.
Aviva and Hargreaves Lansdown are calling for a new solution to be considered as part of the ‘pot follows member’ debate.
Aviva’s Head of Policy, John Lawson, and Hargreaves Lansdown’s Head of Pensions Research, Tom McPhail, said that a ‘true’ approach to ‘pot follows member’ would involve employees having a single pension, which they owned and carried with them as they moved from job to job.
The ‘one member, one pot’ approach differs to those currently on the table – the centralised database with pull style transfers, and the pensions P45 – in that it would not involve any physical transfers of money.
The Government is working with the pensions industry to develop a solution to the problem of small pension pots. A provision has been included in the Pensions Bill to enable the Government to create an automatic transfer system. Any pension pots of less than £10,000 left behind when someone changes jobs would be automatically transferred to their new employer’s pension.
Comment from John Lawson:
Aviva’s John Lawson said an alternative approach to ‘pot follows member’ could avoid risky and costly transfers, and simply allow the employee to keep their pot with them and continue to save into it with their new employer.
He said that under the ‘one member, one pot’ approach an employee would inform their new employer of their pension account reference number and the name of their provider/scheme. This information could be added to an employee’s P45 form containing income, tax and NI deductions from their previous employment. Employees without a pre-existing account, for example those new into the workforce or reaching the automatic enrolment trigger age of 22 years, could be auto-enrolled into the employer’s scheme.
“An approach that allows an employee’s pension pot to stay with them in the truest sense, without the risk and cost of transferring money to a new scheme is worthy of consideration - before legislation is passed,” Mr Lawson said.
“Although employers would need to pay into multiple pension schemes/providers for each of their employees, this would not create the same administrative burden as it would have in the past. Automatic enrolment software developed to assist employers assess their workforce is now capable of facilitating employer payments to multiple schemes without creating any additional payroll administration.
“It’s important we look at all the options available to creating an effective solution as the objective must be that employees have a simple and safe way of managing their pension savings across the many years of their working life.”
Comment from Tom McPhail:
Hargreaves Lansdown’s Tom McPhail said there were a number of challenging issues with the models currently being proposed as part of ‘pot follows member’, and ‘one member, one pot’ could provide the answer.
“This idea of arbitrarily moving people’s pension saving whenever they change jobs is contrary to everything we know about behavioural economics,” Mr McPhail said.
“If you want to encourage someone to become comfortable and engaged with their retirement planning, the last thing you want to do is change their pension every time they change jobs - how can you possibly expect them to take an interest in their pension under these circumstances?
“Pension Liberation fraudsters could use automatic transfer under the current proposals for ‘pot follows member’ to facilitate syphoning money out of the pensions system. By contrast, if the default is that the money doesn’t move unless the member actively chooses to transfer it to their new employer’s scheme then the risks are substantially reduced.”
Mr McPhail summarised the benefits of ‘one member, one pot’:
- The ‘one member, one pot’ approach encourages individuals to take an interest in their pension.
- Providers are also encouraged to invest time in their members with the aim of keeping their business for decades.
- It eliminates the need for the £10,000 threshold currently being proposed for ‘pot follows member’ - an arbitrary limit that makes little sense to the public.
- As there are no transfers of money, the ‘one member, one pot’ approach minimises the risk of pension liberators accessing the system during a complex transfer process.
- There is no need for an opt-out process, which is not the case with other models being considered.
- ‘One member, one pot’ also reduces the risks inherently attached to approaches that involve money moving around the pension system, with the possibility of investors being out of the market or money getting lost.
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