Savers could see 25% of pension wiped out under new proposalsGovernment wants new 'pot follows member' scheme

16 October 2012

Which? has raised concerns with government plans to allow people who move jobs to take their pension savings from previous employers with them and transfer them to their new employer's pension scheme, warning that savers could lose as much as 25% of their pension value under the proposals. 

Leading consumer groups - Which?, the National Association of Pension Funds (NAPF), Age UK and the TUC - have today written a letter to Webb urging him to rethink this plan, dubbing the Department for Work and Pensions' plans impractical and risky.

Take your pension pot wherever you work

The scheme, called 'pot follows member', has been designed to stop people's pension pots lying dormant when they change jobs. The DWP is considering this now because auto-enrolment, which will see all companies offer pensions to their staff, started this month. Read more about this in our 60-second guide to pensions auto-enrolment.

Although auto-enrolment will get up to 11 million people saving into a pension, it may leave many pension pots stranded with previous employers when people leave their jobs.

The DWP predicts there will be 50m dormant pots by 2050 if something isn't done. Pensions Minister Steve Webb says: 'Our analysis clearly shows that 'pot follows member' is the best way to help people. It is time to stop debating different options and get on with making positive change for consumers.'

New pension proposals are 'unacceptably risky'

But the groups writing to Webb say 'pot follows member' is not the right solution, stating that people's pension value could be reduced by as much as a quarter, because pots could be transferred out of good schemes with high returns into poor schemes with low returns. 

The letter says: 'We agree with the government that a system to automatically transfer these small pots is necessary. However, the government's solution is impractical and risks reducing individuals' retirement income.' The NAPF's Joanne Segars adds that the government could create a 'pensions lottery that leaves many people out of pocket.'

Pension alternatives

The groups say that a system of aggregator schemes will work better than 'pot follows member'. The aggregators would pool people's retirement savings from all their jobs in one place, at a low cost.

According to their calculations, a person on half-average earnings who saves into a pension for 45 years would end up with a pension worth £82,000 in an aggregator scheme – but they'd get just £61,000 if the government's plans are implemented.

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