Workers stack up dormant pensions as they move jobs and charges can eat away at smaller pots
- The UK workforce has built up 8m dormant pensions worth £1,000 or less
- The number is forecast to rise to 27m inactive pots by 2035
- Small funds are more easily eroded by fees and providers may pass on extra management costs
- How do you merge your old pension pots – and is it a good idea? Find out below
Workers have built up 8million dormant pensions worth £1,000 or less as auto-enrolment means they acquire a new pot every time they change jobs, new research reveals.
The number is forecast to rise to 27million small inactive pots by 2035, which the study suggests will become unsustainable because of a double blow on charges.
Small funds are more easily eroded by fees, and providers may also pass on extra management costs to savers over the long term, according to the report compiled for NOW: Pensions.
Moving jobs: When workers change employers they leave pension pots behind
This could undermine the success of auto enrolment, which made it compulsory for employers to offer most workers a pension unless they opt out, and has led to a dramatic rise in people saving for retirement since its launch in 2012.
Millions of savers are likely to consider consolidating multiple smaller pension pots into one larger pot in coming years, but there are drawbacks.
Former Pensions Minister Steve Webb explains the potential pitfalls for people tempted to ‘tidy things up’ by combining smaller retirement pots here. They include losing valuable benefits and tax privileges.
Meanwhile, understanding of workplace pensions is so low that one in ten people wrongly believe they forfeit all their old contributions when changing jobs, according to one survey.
Younger workers are most likely to make this mistake, though a sizeable number will realise their error later in life.
The NOW: Pensions report says that today every active member in an auto enrolment pension is supporting one inactive member, but by 2035 the ratio will be one active member to more than three inactive members.
The current cost of operating 8million ‘deferred’ pots – meaning those where a worker has moved to a new job and is no longer actively contributing – is £130million a year.
But the cost of running 27million small pots in 15 years’ time will be £500million a year, according to the report compiled for NOW by a research charity, the Pensions Policy Institute.
A pension pot needs to be £4,000-plus for a provider to break even on the cost, it estimates.
NOW is calling for a ‘Small Pots Taskforce’ made up of government officials, regulators, pension firms and consumer groups to be set up by the end of this year, and asked to propose a solution by the end of 2021.
The PPI suggested the following ideas.
Pension dashboards: The pending official website showing people all their pensions in one place – or commercial offshoots if they are permitted – could include tools allowing people to consolidate their pots more easily. There is no launch date for the Government-backed dashboard.
Same provider consolidation: When workers move to an employer which has a pension provider they have been signed up to before, they could be enrolled back into their old deferred pot.
Pot follows member: Worker’s pots would move with them when they changed employer, but the Government has looked at this before and ultimately dropped the plan.
Member exchange: This is where pensions schemes would regularly swap pension pots of similar values, with the aim of workers receiving cash from their deferred pots into their current ones, and providers ending up with more active funds.
Lifetime provider: Workers would remain with the same pension provider whenever they moved jobs.
Default consolidator: Pots left dormant for a year would be transferred to a consolidator provider, unless workers opted out.
NOW says the number of pension scheme members with deferred pots has grown rapidly, because when they change jobs they often leave a small fund behind.
But this means they cannot benefit from ‘economies of scale’ – reduced costs from having a larger pot – and they might face multiple charges for each of their pots, and easily lose track of them, explains the firm.
Adrian Boulding, director of policy at NOW, says: ‘The PPI work has revealed no single magic bullet will provide an immediate fix for problem of small pots. There are merits and drawbacks to all the solutions on the table.
‘Until the issue of small pots is resolved, the cost of small pots must be paid for in some form. We welcome the government’s recognition that a complete ban on flat fees could eliminate competition in the market and force up fees for savers.
‘To pull the funding of small pots by changing the charging structure will destabilise the market.’
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