Business
The Impact of Employment Trends on UK Pension Pots
Global Banking & Finance Review®
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By Dan Richards, Client Director – Pension Trustee & Governance at ZEDRA
Pension providers, trustees of defined contribution schemes, and employers should consider the impact of employment trends on pension pots and reflect on what they can do to protect members.
Ask any recruitment consultant in the UK and they will tell you that business in 2022 is brisk. Employer demand for talent and skills has ballooned, with many of those roles in high-turnover industries, such as hospitality, which have been hit hard by the pandemic.
All those job vacancies and short-term roles will exacerbate a significant Defined Contribution Pension Scheme problem: small, deferred pension pots.
Pots with just a few hundred or thousand pounds in them risk being eroded over time by fees, and that will ultimately destroy members’ retirement savings. It’s also a problem for schemes bearing the ongoing costs attached to administering small pots.
Evolving employment patterns combined with auto-enrolment mean that we’ll see even more small pots created over time. The Department for Work and Pensions estimates that by 2050, there will be around 50 million deferred Defined Contribution pots. Many of these will be in master trusts, but trustees of single-employer Defined Contribution schemes are likely to see similar issues in their own schemes.
Deciding how to handle small pots necessitates taking both members’ and the scheme’s needs into account.
Can we provide value for money for members?
Pots of less than £100 are now protected from charges but this won’t help everyone. If members with deferred small pots are seeing their savings shrink rather than grow, then it is important to help members consider other options. Some ideas to include are:
What is the best long-term approach for your scheme?
For schemes with high member turnover, managing small pots can affect wider scheme governance. If the cost of dealing with small pots is having a detrimental effect on other aspects of the scheme, such as quality of member communications or investment strategy, it is time to think seriously about a different approach as this will affect value for all members.
Are there other approaches to governance?
It’s unlikely that small pots alone will drive a change of scheme structure and governance, but it may be a contributing factor for trustees. Since December 2021, schemes with less than £100 million in assets must assess and report on whether members would be better off in another scheme, from a value–for–money perspective.
A pension pot is a sum of money accumulated in a pension scheme, which is used to provide income during retirement.
Deferred pension pots are retirement savings that are left untouched when an employee leaves a job, often resulting in smaller amounts as they accumulate over time.
Defined contribution schemes are retirement plans where the amount contributed is defined, but the final benefit depends on investment performance.
Pension trustees are responsible for managing a pension scheme's assets and ensuring that the scheme operates in the best interests of its members.
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