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:
- Engage with deferred members so that they are aware of the pot they have with your scheme and how it could fall in value over time. People often lose track of old workplace pensions, especially if they were only with an employer for a short period of time. When pension dashboards become more commonplace, these should also help people to keep track of old pensions alongside scheme communications.
- Help members understand their options. Ask your advisers to find ways to help members. For example, it might be useful to educate members about transferring old Defined Contribution pension pots into another arrangement, such as their current workplace pension scheme. But that must be balanced against what is best for the member. For example, if your scheme has additional benefits associated with the pension, members may have to think more carefully about transferring.
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.
- Explore options in more depth. The pensions industry is starting to explore options for schemes with the Small Pots Cross-industry Co-ordination Group combining expertise from different sources to look into this issue in depth.
- Understand the size of the problem for your scheme. Make sure that you understand the cost to your scheme of small, deferred pots and that you set this out clearly in documents such as your Chair’s Statement. Being transparent about the impact small pots are having is part of the process of addressing them.
- Consider another provider for small pots. It may be possible to transfer small, deferred pots into a master trust or other arrangement. However, trustees may find that many master trusts are unwilling or unable to only accept deferred pots, not least because master trusts are already disproportionately affected by small pot problems among their own memberships.
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.