Automatic enrolment into workplace pensions, introduced in 2012, has been a big success, bringing more than 10 million people into pension savings for the first time. However, an unresolved side effect of the policy is that each new job brings a new pension, and those who change jobs frequently can end up with multiple pension pots, often small in value, scattered across the pensions landscape. LCP estimates that over 2 million new pension pots are left behind each year as people change jobs and start a new pension, and there are now over 16 million small deferred pots worth under £2,500. 

The government is considering a range of initiatives to tackle this problem including automatic consolidation of ‘micro’ pension pots (under £1,000) and more controversial ideas focused on giving ‘member choice’ in workplace pensions, as floated in the 2023 Autumn Statement. 

New analysis published today by consultants LCP highlights serious problems with the government’s approach.

These include: 

• A big increase in the cost of providing pensions, as new computer systems would be needed to consolidate micro pots and to facilitate member choice, whilst employers would face increased costs as they had to send pension contributions to different schemes for each worker.
• A risk of members making poor choices as they may find it hard to compare multiple past pension providers and choose which one was the best; they would also be bombarded by marketing as providers competed for their business, and this would also add considerably to the costs of providing pensions.
• The risk is that ordinary savers would be left behind if higher earners exercised member choice and moved their pension money elsewhere. The remaining workplace scheme would be less cost-effective for a pension provider, which might hike its charges in response to the detriment of the remaining members.  

Given the many problems associated with the government’s plans, LCP has now set out proposals for a simpler alternative to solving these problems which it has called ‘Magnetic Pensions’. 

The basic idea is that each time a person changes jobs, their past pension would be ‘magnetically attached’ to them and move with them to their new job, which would be combined with their new workplace pension. Small pots would continue to be combined in this way until the worker had accrued a decent single pension pot, at which point the automatic transfer of pensions would cease. Workers would be free to opt out of this process at any point if they wanted their pension pot to remain where it was. 

The ‘Magnetic Pensions’ proposal builds on the 2014 Pensions Act proposal for a ‘pot follows member’ solution, which was passed into legislation but never implemented. The new proposal would build on the infrastructure provided by the Pensions Dashboard Programme, which is due to go live in the next few years. Dashboards provide a ready-made network of connections between pension schemes and a central system which could be readily harnessed for the purposes of delivering the Magnetic Pensions proposal. 

Commenting, Laura Myers, Head of DC Pensions at LCP, said: 

“With over 2 million new pension pots being left behind each year as people change jobs, we urgently need a solution to the problem of small pension pots. However, the government’s plans are complex and expensive and will take years to implement. Worse still, they may lead to worse outcomes for many ordinary pension savers.  

“We are advocating a much simpler and more cost-effective solution which keeps the best features of automatic enrolment, such as a single pension scheme in each workplace, but makes sure that people do not reach retirement with large numbers of small pension pots. We hope that the next government will think again about the current direction of policy and instead deliver a solution which pension savers will understand and which will deliver the best outcomes for people on average and lower incomes.”

Commenting on the report, Jamie Jenkins, Director of Policy & Communications at Royal London, said: 

“This is an eminently sensible proposal which would be easily understood by savers as they move from job to job, bringing their small pension pots with them. While it might not have been the right time to implement this during the phasing of automatic enrolment, ‘pot follows member’ should now be revisited, having identified the serious challenges with other proposals.”