New Office for National Statistics (ONS) figures show the number of preserved pension entitlements increased by 3.6 million in 12 months, suggesting the UK is “drowning in a sea of small pots”, warned Adrian Boulding.
In 2015 the number of preserved pension entitlements was 11.8 million but this rose to 15.4 million in 2016, according to the ONS.
Since automatic enrolment, all employees earning above the earnings threshold have been enrolled into a pension scheme. As a result, those who switch jobs relatively often can have small pots dotted around the pensions landscape.
Dunstan Thomas director of retirement strategy Boulding (pictured) warned the existence of so many small pots meant there was a real danger of members losing out on money if they failed to keep track of the companies they had a pension with and the pension schemes they were part of.
Additionally, said Boulding, longer-term members keeping schemes afloat by contributing to their pension may well be paying higher fees as a result, as the annual fee charged on a small pot will likely not be enough to adequately service the pension, meaning the money to administer the scheme must come from elsewhere.
A preserved pension entitlement accrues when a scheme member ceases to work for the scheme’s sponsoring employer. Usually, the former employee will opt for a preserved pension entitlement, where the rights remain in the scheme and a pension comes into payment at normal pension age.
‘Pot follows member’
In order to help to ease the problem, Boulding said, the ‘pot follows member’ idea first mooted by Steve Webb when he was pensions minister during the coalition government would be “good to resurrect”.
During his time as pensions minister, Webb passed primary legislation to introduce the system, which would automatically see a pension pot ‘follow’ an employee through various employments. In the Conservative-only administration that followed the 2015 election, however, the legislation was scrapped.
Boulding said the legislation was a “good example of the coalition government doing something sensible”, adding: “It is great automatic enrolment is bringing people into pensions – but not that ‘pot follows member’ was left on the shelf.”
‘Not full picture’
The ONS figures showed total membership of occupational pension schemes in the UK was 39.2 million in 2016 – the highest level recorded by the survey and an increase of 17.1% on the 33.5 million of the previous year.
Old Mutual Wealth pensions expert Ian Browne said, however, that while it was “encouraging” to see auto-enrolment gaining momentum, it was “not the full story”.
“Opt-out rates are low but not insignificant and the real test will come in 2018 and 2019 when minimum contribution levels increase,” he continued. “They go up to 8% by 2019, and it will be important to keep an eye on participation rates then.”
Browne also highlighted the “large numbers of people excluded” from auto-enrolment, such as the self-employed and those earning below the auto-enrolment threshold of £10,000.
He added: “The earnings threshold is a particular issue for those working multiple jobs paying under £10,000, who are eligible for auto-enrolment based on total earnings but are not pulled into the system because their income is spread between several part-time roles.”
The post ONS figures show UK ‘drowning in a sea of small pots’ – Adrian Boulding appeared first on Retirement Planner.