Small pots, a big problem

At the last count, there were a whopping 18 million dormant pension pots1 – the vast majority low in value, with some holding as little as one pence.

Since 2012, whenever eligible workers start a new job, they are automatically enrolled into a pension scheme, and when they leave that job for the next one, the pension pot they’ve built up stays where it is. Rapid movement from job to job, low pension contributions and a large array of providers operating in the pension market are all reasons for this surge in small pots.

Put bluntly, auto-enrolment is a small pot creation machine – a side effect of an otherwise hugely successful policy that has set more than 10 million savers on the road towards a decent retirement.

The proliferation of small pots has negative consequences for savers as people risk losing touch with their pension pots, and hard-earned cash, as they move through the labour market. Costs for pension providers increase too – proportionately, small pots are more expensive to administer.

Based on Department of Work and Pension (DWP) figures, we anticipate £9.75 million2 is currently being raised via the General Levy and fraud compensation levy from dormant pots – a figure that is anticipated to increase. The General Levy on occupational and personal pension schemes recovers the funding provided by the DWP for The Pensions Regulator, The Pensions Ombudsman and the Money and Pensions Service and is levied against the number of members, regardless of how much they have in their pension pot.

It’s structured to ensure that every year it raises more money, meaning that with no policy change, we anticipate a 90% cumulative increase in our levy payment between 2018/19 and 2022/23; an increase of £1.6m. These factors help explain why 10 master trusts – including The People’s Pension – will pay a quarter of the total levy in 2020/21, even with no increase in the levy rate. They will pay 25% despite holding just 2% of occupational pensions sector assets, despite their members including millions of low earners in high turnover sectors who have small pension pots – many worth just a matter of pennies.

The growing problem of small pots is clear, the solution less so.

Sir Steve Webb, when Pensions Minister, proposed a system whereby pots would follow people from job to job. Pot follows member, as it was called, ran into difficulties for two reasons: first the high unit cost of a pension transfer – estimated at £100 split evenly between the ceding and receiving scheme. Secondly, the proposed system was impossible to secure against fraud by nefarious employers.

This provides us with plenty of learnings, meaning that any future solution to the small pots problem will need cheaper transfer costs as well as assurances around its security, will need to reduce the unit costs of transfer to a minimal amount and will need watertight security.

It will also need to ensure that any solution is automatic and removes the need for human intervention. We know this because in Australia, superannuation already has the functionality for people to voluntarily consolidate their ‘lost’ pension pots through the country’s pensions dashboard or have their trust-based provider do it for them. Australians don’t do this very much and we have no reason to suspect that Brits would be any more motivated.

Value for money matters too. Contract-based pension providers – where there is an individual agreement between members and providers – have been pushed hard by government and the regulators to get their act together following the bruising 2013 Office of Fair Trading report into the sector. Independent governance committees – bodies established by firms to oversee their contract pension scheme – are still too weak to fight the saver’s corner but they are a start. For master trusts, all eligible schemes operate inside a charge cap.

The regulation of retail pensions is much weaker. So any solution to small pots which risks opening the floodgates to a rush of pension savings from lower cost, better governed workplace pensions into more expensive retail pension products would have unintended consequences. Costs matter so much over the long term of a pension saving arrangement.

There are some factors limiting the growth of small pots. Some pension schemes operate a ‘single pot’ model. Both NEST and The People’s Pension ensure that people who are re-enrolled back into these schemes keep saving into their old pot, preventing the growth of small pots.

Then we have the consolidation of the market, with the master trust authorisation round of 2019 more than halving the number of master trust pension schemes and we expect consolidation in the single employer trust space to continue. The DWP could help handle the small pot problem by further forcing the pace of consolidation, following their consultation paper on the issue earlier this year.

What is clear is that soon the pensions sector will need to come together to hammer out a solution to the small pots issue and prevent the problem developing further.

Workplace defaults: better member outcomes

Switching from a pension default fund could cost ‘DIY’ investors up to £247,000.

Our new research with State Street Global Advisors shows that DIY investors risk missing out on up to £247,000 by switching from their workplace pension scheme’s default investment strategy and making their own fund choices instead.

Workplace defaults: better member outcomes reveals the potential cost of 4 of the most common mistakes made by pension savers who choose to be their own investment manager rather than investing in a default fund.

It shows how different savers, who display particular behavioural biases, perform over 4 decades, compared to someone who stays invested in a well-run default fund throughout.

The saver profiles include:

  • Cautious Connor – doesn’t like taking risks so invests in a cash fund
  • Performance chasing Patricia – buys high into a strongly performing fund
  • Eggs in one basket Elliot – fails to diversify his portfolio
  • Forgetful Fiona – is initially an active investor but fails to keep her portfolio under review

The report also focuses on the lack of knowledge around charges paid on pension pots, with almost 8 in 10 (78%) of savers unaware that a fee is taken from their pot1.

Download our ‘Workplace defaults: better member outcomes’ report

1 Source: The FCA Financial Lives Survey found that 78% of defined contribution savers were not aware of charges on their pension.

Response to TPR’s annual commentary and analysis report

Response to TPR’s annual commentary and analysis report

Commenting on TPR’s annual commentary and analysis report, Gregg McClymont, director of policy at The People’s Pension, said: “It’s fantastic to see that a growing number of people in their twenties are saving into a workplace pension thanks to the success of automatic enrolment, but millions of workers are still missing out because they’re too young, work part-time or don’t earn enough.

“While it’s encouraging that as many women as men now saving into a workplace pension, we can’t ignore that women are still significantly worse off than men in retirement and much more needs to be done to address this inequality.

“Lowering the age limit for auto-enrolment to 18; calculating people’s pension contributions from the first pound they earn; and reducing the amount someone needs to earn to be eligible for a pension could put billions more into savers pension pots, bring more women into pension-saving, and help hundreds of thousands of younger workers save towards their future.”

ENDS

Should I Stay or Should I go

Should I Stay or Should I go

Official statistics released by the Department for Work and Pensions show that just under one in ten of those who are eligible have chosen not to take part in their workplace pension, so we were interested to find out about the drivers behind this behaviour and what the final impact of the last increase in contributions in April 2019 will be.

The Research

The People’s Pension and SSGA co-sponsored a qualitative assessment with an independent research agency – Ignition House to understand why a group of individuals who had been offered a workplace pension had chosen not to join, as well as a group of individuals who had joined their workplace pension but had since chosen to stop their contributions.

Participants

Ignition House found 30 participants for the study – 22  people aged 22 to 60 who had been offered a workplace pension and had chosen not to join (opt out respondents) and a further 8 people aged 22 to 60 who had joined their workplace pension, but had chosen to stop their contributions (cessation respondents).

Method

Exploratory in-depth discussions were carried out to understand the drivers behind this behaviour and to understand what the likely impact of the increase in contributions in April 2019 will be.

Respondents came from a variety of backgrounds and experiences.  A mix of people by age and gender, along with those working or small and larger employers across a broad mix of sectors were recruited.

Outcome

The research shows that opting out was merely a timing issue i.e. it hadn’t been the right time to start saving into a workplace pension scheme.

Other aspects identified included:

  • There was little evidence that employers were seeking to discourage people from joining the scheme
  • Little was done by employers (apart from large employers) to sell the benefits of auto-enrolment savings
  • Some had misconceptions of the rules of auto-enrolment, including the perception that they needed to opt in but reframing and better information led to a “lightbulb moment” for example employer contributions being “free money”
  • There was strong support for re-enrolment, as a “nudge” for them to reconsider
  • The future impact of phasing was not clear cut.

Read the full report from Ignition House

Should I Stay or Should I Go?

Just under 1 in 10 people eligible for a workplace pension chose to opt out – according to the Department for Work and Pensions in 2018. So we worked to uncover the drivers behind this behaviour and what the final impact of the last increase in contributions in April 2019 could be.

Alongside State Street Global Advisors and Ignition House we worked to understand why people would opt out of a workplace pension or choose to stop saving into one.

The research shows that opting out was merely a timing issue – it hadn’t been the right time to start saving into a workplace pension scheme.

Other aspects identified include:

  • There was little evidence that employers were seeking to discourage people from joining the scheme
  • Little was done by employers (apart from large employers) to sell the benefits of auto-enrolment savings
  • Some had misconceptions of the rules of auto-enrolment, including the perception that they needed to opt in, but reframing and better information led to a ‘lightbulb moment’, for example employer contributions being ‘free money’.

Download our ‘Should I stay or should I go?’ report

Employee & employer attitudes to workplace pensions

With the huge success of auto-enrolment, we were interested to find out what employees and employers really thought about pensions as a workplace benefit.

Our research, conducted by YouGov, revealed that employer pension contributions are among the most valued employee benefit, yet around half of businesses are failing to realise their worth.  This means employers could be missing a trick with how their workplace pension scheme can help to attract and retain employees.

Our survey of 500 human resources professionals and more than 1,000 employers across the UK highlights how employers can play a significant role in helping their staff maximise the value of their pension savings but also benefiting their business by helping them to recruit and retain staff.

Download our ‘Employee and employer attitudes to workplace pensions’ report