2nd July 2013

Small pot transfers - an auto enrolment update

We look at the Government's proposals for the automatic transfer of small pension pots.

Together with auto enrolment, it's estimated that this could mean up to 33 million 'orphan' small pension pots of less than £10,000 by 2050.

To solve this problem the Government has confirmed its intention to put in place a system of automatic transfers of small pension pots.

Key points:

• The pot size limit will be £10,000 - there will be a requirement for the Department for Work and Pensions (DWP) to review this figure.
• Initially, automatic transfers will be allowed only between 'pure' defined contribution (DC) schemes. This means, for example, that defined benefit schemes, or DC schemes that offer any sort of guarantee, would be out of scope.The Government will set out what schemes will be covered following consultation.
• Only workers who are active members of a qualifying pension will be covered to start with. The Government will consider adding or excluding certain worker types n the future.
• A small pot will only be automatically transfer where it was created after a certain date and where contributions have ceased.
• To protect the consumer, the Government will set out standards that automatic transfer schemes must meet.

There are no concrete proposals as to how the automatic transfer system will work in practice although two approaches are suggested. The first relies on an IT system that will tie up small pots when people move jobs, the second relies on a paper based system where workers are given a 'Pension Transfer Information Document' to take to their new employer.

Workers will have the option to opt out of the automatic transfer process so that their pension pot remains with their previous employer.

There will be no advice process however workers will be given information about their automatic transfer.

Next Steps

A Pensions Bill has been laid before Parliament that sets out the framework for automatic transfers. There will be a consultation process that is expected to start at the end of the year to put in place the detailed processes required.

There is still scope for the Government to be persuaded that a different method to automatic transfers can be found however the general principle that small pots should not be left stranded will remain.

Further information

If you'd like to discuss small pot transfers in more detail, please contact your usual Scottish Life contact.

Regulation, Pensions, Auto-Enrolment