The Department for Work and Pensions’ proposals for a “pot follows member” scheme could costs savers a quarter of their pension, according to an influential group.
In July, pensions minister Steve Webb confirmed plans to introduce a new system where automatic enrolment pension pots would move with employees automatically when they change jobs to minimise the number of small, dormant accounts.
National Association of Pensions Funds chief executive Joanne Segars (pictured), Age UK director general Michelle Mitchell, Which? Chief executive Peter Vicary-Smith and TUC general secretary Brendan Barber have written to Webb and the Telegraph to voice their concerns about the proposals.
The group says the plans are “impractical”, “unacceptably risky” and could be “highly expensive”.
It argues the scheme could reduce the value of savers’ pensions by up to 25 per cent over the course of their career because money could be transferred from good schemes with low fees and high returns to poorly managed schemes with high charges and low returns.
The letter says: “We agree with the Government that a system to automatically transfer these small pots is necessary. It is vital that savers are able to get maximum value from even small amounts of savings.
“However, the Government’s solution, where the pot follows an employee who moves job, is impractical and risks reducing individuals’ retirement income. Pots could be transferred into poorly managed schemes, with high charges and low investment returns.”
The group is calling for a low-cost aggregator scheme to pool people’s retirement pots from previous employers in one place. When workers move jobs, they would start saving into their new company’s scheme, while their old pot would be transferred to the aggregator.
Last month, Money Marketing revealed the Government’s pot follows member plans are under threat because the industry is refusing to pay up to £40m to build the infrastructure necessary to implement the reforms.
Money Marketing understands the pension industry wants the Government to stump up between £20m and £40m to build a “central information hub” to facilitate auto-transfers.