Summary
- Automatic transfers will take place between money purchase schemes.
- A pot will be eligible for automatic transfer:
- either once all contributions have ceased and the individual has left employment or once all contributions have ceased for a prescribed period,
- aslong as the pot was created after a certain date and
- ifit is less than £10,000 (with a requirement on the Secretary of State to review the limit and revise it if appropriate).
- Members will be able to opt out and leave their pension pot in their previous employer’s scheme.
- The Government may prescribe standards for automatic transfer schemes.
- The Government will work with interested parties to facilitate a streamlined transfer process.
- Regulations will specify what information should be given to the member, and by whom.
- The Pensions Regulator (TPR) will be the main enforcement body for the automatic transfer process.
- Short service refunds will be withdrawn for those in money purchase schemes from 2014.
Background
The Government issued a consultation in December 2011, with its response published in July 2012, aimed at addressing the problem of “small pots” – small pension accounts that relate to former scheme members. We reported on this in an earlier news item; to read that again click here.
The reasons why “small pots” pose a problem are that they are usually too small to allow the member to buy an annuity at retirement, so threatening his income in retirement, and they are not cost-effective for former employers and/or pension providers to maintain. Having said that, as part of the same consultation, the Government set out its intention to abolish the right to pay a refund of contributions to scheme members who leave a scheme within two years of joining. The rationale for this was to ensure that those who are auto-enrolled stand more chance of building up a meaningful pension entitlement, rather than receiving a series of refunds if they move job frequently.
The latest proposals
Following the consultation the Government decided to proceed with the option of members’ pension pots following them automatically as they move jobs. The legislation introducing the new system is included in the Pensions Bill now before Parliament. However, much of the detail will be included in subsequent Regulations.
The Pensions Bill includes provisions requiring pension schemes to provide information about dormant pension pots held by members and to initiate and process transfers of those pots. The processing of transfers may take place each time a former member joins a new scheme or on a bulk basis at regular intervals.
On joining a new scheme, individuals will have a limited period in which to opt out of the automatic transfer process, otherwise any eligible small pot will be transferred to the new scheme. The individual will have to be given certain information about the transfer in order to inform his decision as to whether to opt out.
The automatic transfer process will not apply to defined benefit pensions, only to to ‘pure’ money purchase benefits, meaning those benefits that are calculated solely by reference to the assets held in a member’s fund. Both the transferring and receiving schemes will have to be money purchase schemes. However, the Government may extend this to other types of scheme in the future, such as the Defined Ambition schemes that they aim to encourage.
Initially the automatic transfer regime will apply to all workers who are active members of a scheme, not just those who have been enrolled automatically.
Pots of up to £10,000, created after a date yet to be specified, will be eligible for automatic transfer if all contributions have ceased. The £10,000 limit will be reviewed at least every 5 years. The regulations will also set minimum standards that must be satisfied by schemes receiving automatic transfers, including a limit on charges. However, while protecting members, this measure is likely to reduce the impact of automatic transfers (and the extent of consolidation of small pots) if the standards are set too high.
The Government is looking to develop a streamlined transfer process, either through an IT system that matches pots with individuals and their schemes or through a system that provides information to individuals that they can pass to their new employer (similar to the P45), in order to minimise the costs of the new regime. Under the pot-matching approach, transferable benefit schemes would be required to upload information relating to pension pots in their scheme that are eligible for automatic transfer. When deferred members of those schemes join a new employer’s scheme, that new scheme would interrogate the system to identify pots belonging to their new members and to begin the transfer process.
There will be a further consultation in due course, on the content of the detailed regulations.