Is it time for the return of the refund?

Small pots – big issue

Back in 2014 the Department for Work and Pensions (DWP) estimated that by 2050 there could be 50 million dormant and lost pension pots. That same year, it was announced that the practice of paying refunds to workers who leave their pension schemes with less than two years’ service was to be abolished.

With the workforces of many traditional industries such as retail and hospitality often transient in nature, many of these dormant pension pots will be considered ‘small’ – and the value often eroded over time by the provider charges to administer the funds.

It has taken 6 years for a working group to be formed to look at the problem, with the Pensions Policy Institute (PPI) last month publishing their research on the matter.

Three potential consolidation options are proposed in the research paper:

  1. Pot follows member
  2. Lifetime scheme
  3. Consolidation of pots within scheme

‘Small pension pots’ is certainly the current topic of discussion across the industry and experts seem almost unanimous in their concerns of the PPI’s apparent favoured option of Lifetime scheme. That got us thinking, what other options could be considered?

Bring back the refund

There is no doubt that the abolition of short-service refunds has given transient workers an opportunity to save for an income to supplement the basic state pension and that of course remains an important feature to complement auto-enrolment. But why not consider bringing back vesting in another form? A minimum service period or monetary value could apply, with the member being forced to take a refund (subject to tax) only if they do not nominate a receiving scheme within a set period.

Complications with refunds arise for employer-only contribution structures or salary sacrifice schemes. One option could be for a ‘use it or lose it’ protocol to apply, where in certain circumstances the benefit is forfeited if the member does not nominate a receiving scheme.

Room for a cuckoo in the nest?

I certainly favour the UK taking inspiration from the Australian pensions market. One such feature being the concept of a specialist provider available to receive small pots. Why couldn’t a UK provider offer a specialist ‘small pots’ section to receive dormant ‘small pots’ and do so with reduced offerings and therefore at a reduced AMC to minimise the impact of value erosion?

What’s more, we already have the benefit of a master trust set up by Government to facilitate auto-enrolment, so why couldn’t Nest become the mandated default home for these ‘cuckoo’ small pots?

Solve the real issue – member engagement

Newsflash – employees are not moving from employer to employer leaving their small pension pots behind them to incur relative high charges on purpose. If people understood how charges were eroding the value of their savings and the options available to them, they would act.

The pensions industry has an opportunity to do something. With the upcoming Pensions Dashboard initiative, we have an opportunity to truly raise awareness and understanding.

Why can’t the Pensions dashboard be used to draw attention to the small pots issue and make it easy for people to consolidate? The dashboard should be transparent about how charges are applied across the various providers and should clearly signpost members to which of their pension schemes will accept a transfer-in. DC to DC transfers should be easy, so why not have a ‘one-click’ option on the dashboard and see how many small pots can be consolidated within the first year of the pensions dashboard.

Can we ‘nudge’ small pots out?

There is great innovation happening in the pensions industry at the moment. COVID has accelerated the innovation that was already taking place in member technology offered by providers. Pension scheme members have become more accustomed to using apps and portals for their pension funds, similar to their banking apps. With some collaboration across the providers, use of technology and open banking architecture why not send ‘nudges’ to members with ‘small pots’ via their pension provider apps and invite them to consolidate their pension funds with one easy click (or thumb print, or face recognition)?

No one single answer

Experience tells us that we will need a number of initiatives to improve the situation. Whilst on the face of it Lifetime Scheme is not looking popular, perhaps with some tweaking and if combined with some other ideas, a version of it can be made viable. Necessity is the mother of invention and if the predicted number of ‘small pots’ is to crystallise, we certainly have a need for some new ideas, for the benefit of members and providers alike. Time will tell, but we certainly hope that Guy Opperman delivers on his commitment that the working group is ‘focused on ensuring that consumers can stay on top of their pension savings, make more informed choices about their financial futures and have real returns from their savings’.

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