Dormant pots could cost £1bn in admin charges, research finds

There are more than 9.5m savers now auto-enrolled into a workplace pension, with more than 1m employers participating, according to the Pensions Regulator.

Yet under the current system, a new pot is established for the saver every time they change jobs.

I think this would really destabilise auto-enrolment

Steve Webb, Royal London

This picture is further complicated by the rise of self-employment in the UK. There are currently about 5m self-employed workers in the UK, according to the Office for National Statistics, up from 3.3m in 2001. Their engagement with pensions is currently low.

Having one pot for members throughout their careers could preserve engagement levels, according to Hargreaves Lansdown.

The platform provider’s research indicates that in the early years of having a pension pot, 44 per cent of group pension members are disengaged. After spending a decade with the same pot, just 11 per cent are still disengaged.

Own your retirement journey

In 2011, research by the Department for Work and Pensions indicated that UK employees take an average 11 jobs in their careers, with a quarter of workers working for more than 14 employers.

Hargreaves Lansdown has called for workers moving between jobs to have the right to take an existing pension to a new job. It said that adapting the pension system to allow people to choose one pension arrangement with which they are happy, to then build up their savings in that arrangement over a longer period of time, could boost engagement.

Tom McPhail, head of policy at Hargreaves Lansdown, thinks it is imperative to give members a “sense of ownership” over their pension pots, something he says is currently difficult to achieve owing to the contractual nature of workplace pensions.

“Because the contractual relationship exists primarily between the employer and the pension provider, the individual doesn’t have ownership of their retirement savings,” he said.

Savers who want their new employers to contribute to their pension are forced to sign up to a new pension. “That repeatedly disrupts and disengages the individual from their retirement savings journey,” he observed.

The evidence suggests it is proving even tougher to engage the self-employed with pensions.

Data from HM Revenue & Customs shows that of the 5m self-employed workers in the UK, just 350,000 contribute to a pension.

Last month, the Association of Independent Professionals and the Self-Employed said auto-enrolment should not be extended to the self-employed, recommending that Nest’s ‘sidecar' account initiative be rolled out instead.

McPhail observed that the vast majority of the self-employed have employment experience and will therefore have entered into a workplace pension at some point in their careers.

The DWP’s 2017 auto-enrolment review found that only just over 7 per cent of those with a period of self-employment started out self-employed.

“We are getting them into the pension system, but then we’re letting them go,” McPhail said.

Let the members choose their pots

In 2012, the Association of British Insurers was told by 58 per cent of respondents to a survey that their old pension pot should follow them into a new job, without any input from the saver.

Daniel Taylor, director at third-party administrator Trafalgar House, welcomed the idea of a saver retaining one pot throughout their career, both from the perspective of a member and a provider.

“It removes a huge amount of the administration burden from managing small pots,” he said.

Rather than Hargreaves Lansdown’s proposal representing a ‘pot-follows-member’ scenario, Taylor characterised it as “member chooses pot”.

“Currently most of the transfer processes require an awful lot of oversight, time, management and investment in getting them right,” he said.

The difficulty of a transfer is compounded by disengagement, Taylor added, meaning that “trustees and administrators have to spend an awful lot of time, money and effort tracking those pots down”.

Could this undermine auto-enrolment?

Sir Steve Webb, director of policy at pension and investment provider Royal London, agreed with the need to address the issue of multiple pots, but held concerns over Hargreaves Lansdown’s proposals.

The former pensions minister said: “Existing workplace pension schemes cross-subsidise between people with big pots and people with small pots.”

Webb viewed the proposal as part of a drive to move bigger pension pots onto platforms like Hargreaves Lansdown.

“If you were to allow people with big pots to see a Hargreaves Lansdown advert or an AJ Bell advert, and move their big pot out, suddenly the workplace scheme becomes unviable, because you’ve lost all the big pots,” he added.

“At that point, suddenly, a whole bunch of employers won’t be able to get providers other than Nest. So I think this would really destabilise auto-enrolment”.

McPhail said Hargreaves Lansdown is looking to put individuals in control and solve unresolved policy issues. “It’s disappointing to see an insurance company putting its commercial interests ahead of the members’,” he said, adding that Hargreaves Lansdown does not set a minimum transfer value.