£100 switching cost could hobble pension transfer plans

Automatic pension transfers could be costly for consumers if the pensions industry fails to overhaul its processes.

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By Michelle McGagh

Plans to allow pensions to follow employees could cost £100 every time a worker change job if the pensions industry fails to rectify the drawn-out pension transfer process.

Pensions minister Steve Webb has vowed to bring in his ‘pot follows member’ legislation before the general election next year to allow workers to build up large pensions pots.

At the moment, workers who move jobs are left with a ‘dormant pot’ that sits with their old employer where they make low returns, or at worst risk being lost altogether as companies are taken over and employees mislay paperwork. The government predicts that without legislating to move their pots automatically – known as auto-transfer – there could be as many as 50 million missing and dormant pots by 2050.



Automatic transfers

Under the new rules, pots of less than £10,000 will be moved automatically when a person changes job and the worker will have to opt out if they do not want their pot to follow them. The government is aping the auto-enrolment inertia system that automatically puts employees into their workplace pension scheme and forces them to opt out if they do not wish to contribute.

While the idea of combining small pots of money into what Webb has described before as ‘a big fat pot’ has merit, it will only work if the pensions industry puts a standard pension transfer process in place.

Currently, pension transfers can take as long as six months and Standard Life head of corporate strategy and propositions Jamie Jenkins said the cost of transferring can be around £100 once administration fees from both pension schemes are paid.

‘Pension schemes cost at least £30 or £40 [one each side]…but [the cost] needs to be £1 or 50p to make sure that cost isn’t passed on to the consumer,’ he said.

Tom McPhail, head of pensions research at Hargreaves Lansdown, was equally critical and while ISAs and bank accounts can be moved within days, ‘vested interests’ in the pension industry had not put the processes in place to move retirement savings quickly and efficiently.

‘You have huge sums of money being used [on transfers] by the pension industry because it cannot get its act together and agree a process. [Introducing] pot follows member is game changing in terms of pension transfers…[but] we cannot cling to 20^{th century processes in 21st century businesses,’ he said.}

‘How can we not transfer cash electronically in a certain time frame? We do not have to set an onerous time limit [for transfers] but we do have to move in this direction.’



Pressure to lower costs

While the government recognised there was a cost of transferring pension pots through the pot follows member scheme, Toni Clark of the Department for Work and Pension said she expected to see the pensions industry lowering its charges.

‘There is a cost and that is why we want [pension transfers] to be automated so [the cost] is nowhere near £100,’ she said.

Clark also said the size of the ^{pots that would be moved automatically would increase from £10,000 so that workers were not left with lots of pots of this amount.}

‘£10,000 is the starting point and the [pensions] minister has said he would look for it to be higher,’ she said.

She added that schemes that paid out guaranteed annuity sums – which are typically generous and far above what would be offered on the market today – would not be moved as the worker would lose that guarantee.

Jenkins said the ‘psychology’ of pension transfers needed to be changed in order to stop workers opting out of the automatic transfer process.

‘We have a psychology we need to change,’ he said. ‘We say to individuals that it is dangerous to transfer and fraught with difficulties and tell them how much they may lose by moving. We say they need to get financial advice to do it.

‘There are dangers, but to get to pot follows member we need to get to a mentality that it is a social normality that we move job and our pensions move with us. That is difficult because we have spent years putting it in to peoples’ heads that it is too difficult to transfer.’




Source City Wire