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Experts warn ‘pot follows member’ could cut pension savings by 25%

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.

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Comments

There are 8 comments at the moment, we would love to hear your opinion too.

  1. Interesting comment but since when have centralised, government-sponsored quangos been synonymous with efficiency and value?

  2. Why not increase N.I. both Employer and Employee? Keep these funds separate and make additional OAP payments from here.

    Answer because Governments current and future couldn’t resist dipping into the funds for other purposes.

    State Pension when 1st introduced was from age 70! That should now be more like 75. Life is tough and its not going to ease for a long while

  3. This seems a pretty facile argument – it is just as possible that funds could be transferred from poorly managed schemes with high charges and low returns to well managed ones with low charges and high returns!

  4. None of this has been properly thought through. The NEST pensions revolution is nothing more than a tax to try to relieve the pressure on the benefits system as the low paid reach retirement. It will also enable the government to gradually further reduce the value of the State pension. Pension revolution – who are they trying to kid ?

  5. Fully costed transfer analysis including client specific circumstances, needs and aspirations? Charged to the individual (no cross subsidy or government subsidy to distort the cost)?
    Totally impractical for these small pots, yet anything less than the standard currently required will bring consumer detiment.

  6. Hello Playmates!

    First we had contracting out of SERPS to reduce the burden on the state.

    Now we have NEST to reduce the burden on the state.

    The first worked tolerably well and offered an incentive (the NI rebate) so effective that the Left saw their Utopian vision of the state as the provider of all crumbling before their eyes.

    The second is a tax on employment (the employer contribution) and relies on compulsion to invest money that employees need to pay high taxes (20% VAT on pretty much anything) and feed his family.

    Doesn’t sound good.

    And so the merry-go-round continues.

    Love and kisses

    Larrykins xxxx

  7. Trevor Durham- LEBC Group 17th October 2012 at 12:20 pm

    But almost all DC workplace pension schemes in 2012 have zero initial charge and zero exit charge, so where do they get this from? If cost of each transfer to member is £0, then they could transfer a hundred times and the total cost would still be £0.

    There is one valid point to make, that transferring from a low charged scheme to a very old high charged scheme could in theory be to the employee’s detriment. However, as someone has already commented, it is just as likely to work the other way, indeed I would say much more so given that the overwhelming majority of schemes are on newer, cheaper terms.

    The NAPF should know better than to allow their name to be attached to such misleading news stories.

  8. “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”

    Alternatively money could be transferred from poorly managed schemes with high charges and low returns to well managed schemes with lower charges and good returns.

    Why not employ the services of an IFA to review the benefits before moving?

    We can’t, as a result of RDR there aren’t any IFA’s left who don’t charge ridiculously expensive fees so it’s not worth it!

    All the Government had to do was leave S2P in place and increase NI – simples!!!!

    However in the World of politicians why use 10 words when 4,000 will do!!!

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