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'Risky, impractical' pension-pot merger proposals should be delayed

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  • 'Risky, impractical' pension-pot merger proposals should be delayed

UK - The UK government must delay "risky and impractical" reforms to consolidate defined contribution (DC) pots until after the successful rollout of auto-enrolment, the National Association of Pension Funds (NAPF) has urged.

The organisation has estimated that around £1.4bn (€1.7bn) was currently accumulated in around 700,000 DC funds worth less than £5,000, with the Institute of Fiscal Studies (IFS) estimating that if occupational scheme members consolidated all pots, the number would fall by nearly 30%.

Pensions minister Steve Webb announced a consultation on pension pot consolidation last year, also confirming at the time that he would abolish short service refunds - whereby contributions are refunded if a member leaves a company within two years - by 2014.

However, the NAPF has called on the government not to abolish short service refunds until a system is in place to allow members' pots to be consolidated.

"The Department for Work and Pensions (DWP) is right to set this precondition, as otherwise large numbers of small stranded pots will be created, especially after the introduction of automatic enrolment, increasing the costs of pension provision," the organisation said in its response.

It added that transfers should only be allowed once auto-enrolment has been applied to all companies in the UK - last year delayed until 2018 - with their view based on a survey that found 61% of members were against any changes until that point.

The organisation added: "Trying to implement such a radical overhaul of the system for transferring pensions by 2014 would be risky and impractical, and is not necessary given the auto-enrolment timescales."

The NAPF's director of policy Darren Philp said that while pot consolidation would help achieve good retirement outcomes, it was not the only factor needed to reach the goal.

"Good-quality, large-scale super trust schemes would look after members' interests and could accept small pots automatically," Philp said, echoing calls by chairman Mark Hyde Harrison for the creation of the large-scale trusts.

In a separate consultation, the Investment Management Association (IMA) also came out in favour of larger, single pots for savers and said this could best be achieved by pension savings following a worker from one occupational scheme to the next, as the employer changed.

Jonathan Lipkin, head of research and pensions at the IMA, said small pots could be a "barrier" to engagement, adding that removing this barrier would create a more efficient pension system.

However, the investment manager's lobby group differed with the NAPF on how best to consolidate pots.

"The 'pot follows member' model should not be implemented because it is not practical, and the risks of detriment to people whose pots are moved from a well-run, low-charge scheme are not acceptable," the NAPF's consultation response said.

It argued that approved aggregator super trusts should take on any transfers.

"There should be more than one aggregator scheme, to allow schemes choice on what aggregator to use, to encourage competition between big Super Trust schemes and to stop one mega-scheme dominating the entire market," it said.

The NAPF's member survey found that while 87% argued in favour of consolidating the pots into a "quality" scheme, there was an even split between those who argued in favour of the National Employment Savings Trust as the main aggregator and those who were opposed to the idea.

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