DWP ignores industry views

The implementation of auto-enrolment may be two months away, but the government’s latest plans for helping employees achieve the best possible retirement incomes has been given a thumbs down by the industry.

Following a consultation that began last Christmas, the Department of Work and Pensions has decided that small pension pots built up with multiple employers will follow employees.

The consultation floated two options for consolidating small workplace savings that, as separate entities, reduce the potential income employees can draw at retirement.

Auto-enrolment is expected to lead to far more dormant savings as employees have pots opened on their behalf. Exacerbated by the DWP’s pledge to abolish short-service refunds, the government predicts there could be 50 million such pots by 2050. The department believes its solution could “halve the potential number of dormant pots” by that year.

But many in the industry think pensions minister Steve Webb has made the wrong choice. While the DWP quoted an Association of British Insurers (ABI) survey’s results that found savers favoured the ‘pot follows member’ design, accountants KPMG said that the government’s own consultation feedback showed only a fifth supported the idea.

KPMG’s major concern was that it was the worst time possible – considering the imminent upheaval caused by auto-enrolment – to introduce further administrative reorganisation.

The government claimed its plan would cut costs for providers, whose savings would be passed on to savers in the form of lower charges, while KPMG was adamant that “the only winners will be the pension providers who will continue to see members’ pots moving around the market and charges being incurred each time”.

One alternative that was proposed, but rejected, was to have a single or several aggregator schemes in which all small pots would find a home.

For many, NEST (the National Employment Savings Trust) was an obvious choice. “The solution proposed in the government’s response is not the one that NEST preferred,” said Helen Dean, managing director of scheme development at NEST. “Clearly, for NEST to participate in such a solution will requirement government to review the restrictions into and out of NEST”.

The National Association of Pension Funds’ chief executive Joanne Segars added to the backlash: “The government’s idea… does not tackle the risk that people might see their pension transferred to a worse scheme with higher charges and weaker governance.”

One of the supporters of the ‘pot follows member’ design – L&G’s pensions strategy director Adrian Boulding – conceded this point but suggested employers would be encouraged to improve company schemes to retain key staff. 

So Steve Webb has a decision to make. It is right to ask employees what they think but wrong to put such weight behind the results. After all, the logic behind auto-enrolment is that workers will not save for their retirements unless nudged heavily